Caliber becomes latest victim of US sub-prime mortgage market

Click to follow
The Independent Online

Aftershocks from the collapse of the sub-prime mortgage market in the US continued to be felt across the world yesterday, as a UK-listed investment fund promised to shut its doors and a major private equity house was forced to scale back plans for a fundraising.

In the UK, Caliber, a quoted investment fund that has raised $250m (£125m) to invest in the credit markets, most of it in US sub-prime mortgages, said that its investors had asked it to wind up the ailing business rather than try to find a way to reverse its losses.

Caliber is run by Cambridge Place, a fund management firm set up by two former Goldman Sachs traders in 2002. The pair, Martin Finegold and Bob Kramer, bought and sold mortgage-backed securities for Goldman, and Cambridge Place specialises in so-called collateralised debt obligations (CDOs), which have become controversial since the collapse of the US sub-prime market.

Sub-prime mortgages are home loans for Americans with poor credit histories. Large numbers of these mortgages are parceled together and then sold off in pieces as CDOs to investors across Wall Street and beyond. Because they are backed by monthly mortgage payments, investors such as Caliber were able to argue that they were relatively safe assets. However, demand for CDOs was so high that lenders offered mortgages to more and more people with a higher and higher credit risk, and arrears are now at record levels. The value of the CDOs has collapsed.

Caliber is the second British fund this week to report difficulties. Queen's Walk Investment said that it lost $91m last year because it had to write down the value of its portfolio.

Although Caliber began selling its riskiest sub-prime mortgage-backed assets as early as last autumn, it still had to write down its portfolio by $15.1m last month, after which its major shareholders said that they wanted an orderly shutdown of the fund. The top shareholders include Deutsche Bank, Axa, Henderson and Jupiter Asset Management.

Caliber raised $150m from investors in 2005 at $10 per share, and a further $100m last year at $10.50. It then took on debt to fund bigger bets in the mortgage market.

Just under 60 per cent of the $908m fund is invested in residential mortgage-backed securities, mostly in the US. The sale of assets will be spread over the next 12 months to give time for managers to get the best price. Cambridge Partners expects the disposals to be straightforward - in contrast to the problems faced by much larger hedge funds in the US. Last week, creditors to two Bear Stearns hedge funds, which had $30bn in assets in total, seized mortgage-backed securities they held as collateral, but then found they could not sell them because there was no demand in the open market.

Yesterday, Carlyle Group, the private equity firm, slashed the size of an initial public offering of a fund that planned to invest in sub-prime mortgages. It cut the offering from $400m to $300m, and reduced the price of the shares to $19 from a range of $20 to $22.