Carlyle enters self-destructive phase

Having a panoply of former politicians — including the former British prime John Major and former US president George H W  Bush — on the payroll has not stopped Carlyle Group from ending up with egg all over its face over the collapse of a Guernsey-based mortgage bond fund.

Carlyle Capital Corporation, listed on the Euronext stock exchange in Amsterdam, had leveraged its $670m equity base an astonishing 32 times in order to finance a $21.7bn portfolio of residential mortgage-backed securities issued by US government-sponsored agencies Freddie Mac and Fannie Mae. The borrowings came in the shape of short-term credit — where terms can change at the drop of a hat.

The whole extraordinary conjuring trick fell flat on Thursday, when it emerged Carlyle was either going to have to inject scores of millions into the beleaguered mortgage bond fund or else watch it go belly up.

Shares in Guernsey-based Carlyle Capital Corporation were today suspended on Euronext after the company failed to meet “margin calls” – demands made by banks that it provide further collateral for purchases made with borrowed money. As banks started selling off chunks of Carlyle Capital’s portfolio to retrieve at least some of their cash, shares in the fund plummeted by 58%.

What appears to have happened was that Carlyle Capital admitted it was unable to meet margin calls from four banks, triggering demands from other banks for additional collateral.

Carlyle Capital said in a statement that it may be unable to meet these additional margin requirements, which amount to in excess of $60m, and that further liquidation of assets could be necessary. The company is now said to be in “crunch” talks with its lenders about its financing situation.

“The last few days have created a market environment where the repo counter-parties’ margin prices for our AAA-rated US government agency floating rate capped securities issued by Fannie Mae and Freddie Mac are not representative of the underlying recoverable value of these securities,” said John Stomber, the chief executive of Carlyle Capital with what can only be described as admirable clarity.

Stomber added: “Unfortunately, this disconnect has created instability and variability in our repo financing arrangements. Management is actively working with the company’s repo counterparties to develop more stable financing terms.”

In its annual report published on 28 February, Carlyle Capital claimed it had $2.4bn in unused repurchase (repo) agreements and a $130m liquidity cushion. However, requests by anxious lenders to retrieve their money could quickly exhaust the fund’s liquidity and wipe out its capital. It is now apparently considering “all available options” to avert the crisis.

Carlyle Group extended a $150m line of credit to Carlyle Capital last August, but it is unclear whether any of this actually remains.

It is perhaps unsurprising that Carlyle Group, like many Wall Street banks and private equity players, is having to rely on the largesse of Middle Eastern sovereign wealth funds to fill some of the holes created by its own irresponsible behaviour. Last September, Mubadala Development Agency (a sovereign wealth fund of the government of Abu Dhabi) paid $1.4bn for a 7.5% stake in Carlyle Group. Mubadal may yet live to regret the transaction.

Carlyle is famous for having senior retired politicians as non-executive directors and advisers to help open doors when scouting for deals in sensitive and strategic areas such as defence. It famously managed to turn a £4 million investment into nearly £400 million after it bought into Qinetiq, the U Ministry of Defence’s research arm.

This article was published on 7 March 2008