Carlyle Capital in default, on brink of collapse

AMSTERDAM Thu Mar 13, 2008 2:13pm EDT

David Rubenstein, Co-Founder and Managing Director of The Carlyle Group, speaks at the ''M&A Outlook 2008'' conference in New York November 7, 2007. An affiliate of The Carlyle Group has defaulted on about $16.6 billion of debt and expects its lenders to seize remaining assets as the global credit crunch tightens around leveraged investors. REUTERS/Mike Segar

David Rubenstein, Co-Founder and Managing Director of The Carlyle Group, speaks at the ''M&A Outlook 2008'' conference in New York November 7, 2007. An affiliate of The Carlyle Group has defaulted on about $16.6 billion of debt and expects its lenders to seize remaining assets as the global credit crunch tightens around leveraged investors.

Credit: Reuters/Mike Segar

AMSTERDAM (Reuters) - An affiliate of U.S.-based buyout firm Carlyle Group has defaulted on about $16.6 billion of debt and expects its lenders to seize remaining assets as the global credit crunch tightens around leveraged investors.

The Carlyle Group said in a statement on Thursday that as Carlyle Capital Corp CARC.AS, a fund listed in Amsterdam, was unable to reach a deal with lenders it expected those lenders to take possession of the fund's remaining residential mortgage-backed securities assets.

Carlyle said it had worked "exhaustively" to assist Carlyle Capital and took "extraordinary measures" to help it through its liquidity crisis.

It stressed that Carlyle Capital Corp (CCC) was a separate legal and business entity, and that it believed CCC would not have a measurable impact on Carlyle's other funds, investments and portfolio companies. Carlyle Group said that Carlyle Capital's defaults did not trigger cross-defaults for any Carlyle borrowings.

The Carlyle Group, based in Washington, DC, has more than $75 billion under management. One of the world's largest private equity firms, it owns companies including TV ratings firm Nielsen, doughnut seller Dunkin' Brands and former General Motors unit Allison Transmission.

Carlyle Capital said in New York late on Wednesday that talks with lenders deteriorated after a decline in the value of its mortgage investments, which it said would result in margin calls of $97.5 million on top of the $400 million it was already facing.

A "successful refinancing is not possible," Carlyle Capital said, after trying for the past week to work out a deal with lenders to stave off bankruptcy.

The credit crisis, triggered last year when subprime mortgages made to risky U.S. borrowers went sour, has put increasing pressure on lenders to tighten credit and made it difficult to value collateralized debt, mortgage portfolios and other fixed-income securities -- the investments that Carlyle Capital was set up to invest in.

"We've been expecting, for a while, for the hedge funds to get into trouble," said Andrea Cicione, a credit strategist at BNP Paribas, one of Carlyle Capital's lenders.

"We are in a vicious spiral of unwinding years of increasing leverage in the space of a few weeks," he said, and no one can say how much leverage must be wrung out before the unwinding comes to an end.

Carlyle Capital, based in Britain's offshore dependency of Guernsey, said the only assets it has left are AAA-rated residential mortgage-backed securities, and it expected lenders to foreclose on that collateral.

"It has become apparent to the company that the basis on which lenders are willing to provide financing against the company's collateral has changed so substantially that a successful refinancing is not possible," Carlyle Capital said.

Its shares sank 87 percent to 35 cents, a fraction of their $20 debut price last July. Dutch market regulator AFM said it was monitoring developments closely.

SUPPLY WORRIES

Among the counterparties for Carlyle's repurchasing agreements, Deutsche Bank, Merrill Lynch & Co and Bear Stearns Cos have sold off assets, the Wall Street Journal reported.

A source familiar with the matter told Reuters that Credit Suisse has started selling its CCC assets.

CCC had invested in U.S. prime mortgage-backed securities of Fannie Mae and Freddie Mac, which are high-rated and carry the implicit backing of the U.S. government.

Spreads on these bonds have been widening, however, on fears that investors could dump supply into a saturated market.

Managers at U.S.-based buyout firm The Carlyle Group own about 15 percent of Carlyle Capital Corp, which listed in July 2007 as the credit crisis began spreading through the global financial system.

The Carlyle Group actively participated in the negotiations with lenders and last year extended a $150 million credit line to its affiliate.

According to CCC's annual report, counterparties for its repurchasing agreements as of the end of 2007 were Bank of America, Bear Stearns, BNP Paribas, Calyon, Citigroup, Credit Suisse, Deutsche Bank, ING, JP Morgan, Lehman Brothers, Merrill Lynch and UBS.

CCC is the latest fund or trading firm to encounter problems as a result of the credit market crisis.

New York-based fixed income trader Drake Management said on Wednesday it was considering liquidating all three of its hedge funds. Sources said on Tuesday that hedge fund Blue River Asset Management's main municipal bond fund was liquidating after a sell-off in the bond market.

London-based Peloton Partners, which had held $3 billion in assets, told investors earlier this month it was liquidating its two funds.

(Additional reporting by Emma Thomasson, Yinka Adegoke and Megan Davies in New York, Umesh Desai in Hong Kong and Mathieu Robbins, Jane Baird and Natalie Harrison in London; Editing by Quentin Bryar, David Hulmes, Toni Reinhold)

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