Carlyle fund faces liquidation after missed margin calls

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The Independent Online

Carlyle Capital Corp, an investment fund managed by the US private equity giant Carlyle Group, said yesterday it had received additional margin calls from banks that could cause it to run out of cash.

The fund's shares were suspended in Amsterdam after they lost more than half their value on Thursday when it announced it had missed margin calls. Analysts said liquidation of the fund had become a possibility.

The fund said: "Although the company believed last week that it had sufficient liquidity, it was informed by its lenders this week that additional margin calls and increased collateral requirements would be significant and well in excess of the margin calls it received Wednesday. The company believes these additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital."

If margin calls erode its capital and the fund is liquidated, shareholders would end up with nothing. The fund's annual report said that at the end of 2007 its lending counterparties included Citigroup, Merrill Lynch and UBS, three of the banks hit hardest by credit crunch losses.

Keith Baird, a Bear Stearns analyst, said: "This marks a further savage step in the ongoing credit implosion of recent months... At this stage the liquidation of the fund cannot be excluded."

The shares were suspended at $5 after dropping 58 per cent on Thursday. Carlyle Capital sold shares in the fund for $19 in July in a $300m initial public offering on the Euronext exchange. The fund, which invested in mortgage debt, raised its cash when fears about the US sub-prime market. Those fears forced it to reduce the size of the IPO from a planned $400m.

Carlyle Capital added the $300m IPO money to a separate $590m pool of cash. It then borrowed from banks against the money to buy almost $22bn of top-rated mortgage debt issued by Fannie Mae and Freddie Mac, the government-backed US mortgage finance agencies.

With what Carlyle Capital describes as an "implicit guarantee" from the US government, its investments would normally be classed as highly secure. But panic about mortgage-backed bonds has spread, causing the spread between agency bonds and US Treasuries to hit levels not seen since 1986.

Carlyle Capital said it was in talks with its lenders and "considering all available options".