Carlyle Capital Corp said late on Wednesday it expected its creditors to seize all of the fund's remaining assets after unsuccessful negotiations to prevent its liquidation.
The London-based fund shook financial markets last week after missing margin calls from banks on its US$21.7 billion portfolio of residential-mortgage-backed bonds. Carlyle's troubles have amplified fears that billions of dollars of depressed mortgage-backed securities will flood the market, reducing their value even further.
More than US$5 billion of Carlyle's securities have already been sold, but the fund tried to negotiate with the banks to prevent the liquidation of the remaining US$16 billion.
"Although it has been working diligently with its lenders, the company has not been able to reach a mutually beneficial agreement to stabilize its financing," Carlyle said in a news release.
More than a year ago, the fund leveraged its US$670 million equity 32 times to finance a US$21.7 billion portfolio of AAA-rated residential mortgage-backed securities issued by Freddie Mac and Fannie Mae. It borrowed money from at least a dozen banks and firms, including Bank of America Corp, Citigroup Inc and Merrill Lynch & Co.
Carlyle posted the securities as collateral under repurchase agreements, so if the value of the securities fall, the lender has the right to ask for more collateral -- a margin call -- to secure the loan. If the borrower does not meet the margin call, the lender may sell the security.
The value of mortgage-backed securities plummeted as US home prices fell and foreclosures surged, prompting the banks to ask Carlyle for more than US$400 million in additional capital. The fund was unable to come up with the money, prompting lenders to start foreclosing on the securities.
As of Wednesday, Carlyle said it has defaulted on about US$16.6 billion of its debt and the rest is expected to go into default soon.
Carlyle Capital is one of 55 funds managed by Washington-based Carlyle Group, one of the largest private equity firms in the world with approximately US$76 billion in assets.
Carlyle Group "participated actively" in the fund's negotiations with its lenders to refinance its portfolio and was prepared to provide substantial additional capital if sustainable terms could be achieved, the fund's statement said.
But hopes for refinancing fell apart after some lenders said that the value of the collateral had declined further, which was expected to result in additional margin calls yesterday of about US$97.5 million.
Carlyle Capital is registered in Britain but managed by New York-based executives. It was the first Carlyle Group fund to go public, at US$19 a share in July on the Euronext exchange.
Trading of the fund's shares was suspended last week after tumbling more than 50 percent to US$5 apiece on the news that the fund wasn't able to meet the margin calls.
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