Carlyle hedge fund default sends shiver through credit markets
A fund managed by the US private equity giant Carlyle Group has become the latest to be hit by demands from lending banks making calls on loans secured on mortgage bonds.
Carlyle Capital Corp, a publicly traded fund that holds $21.7bn (£10.8bn) of securities, said it had received a default notice from one of its lending banks and expected at least one more after it failed to meet demands for extra security from jittery counterparties.
The Guernsey-based fund has struggled to meet more than $60m of margin calls and demands for extra collateral since the start of the month. It met the calls until Wednesday, when it was landed with more than $37m of demands and missed four out of seven calls.
John Stomber, the chief executive of Carlyle Capital, said counterparties were demanding margin prices that did not represent the underlying recoverable value of the fund's assets. Carlyle Capital's investments are all AAA-rated securities issued by Fannie Mae and Freddie Mac, the US-Government-sponsored mortgage finance agencies.
"This disconnect has created instability and variability in our repo financing arrangements," he added. "Management is actively working with the company's repo counterparties to develop more stable financing terms."
The return demanded for agency mortgage bonds over 10-year US Treasuries has widened to the highest for 22 years, according to Bloomberg.
Tumult in the credit markets as asset values of all but the safest of debt plummet is prompting lenders to investment funds to demand ever-greater security for their loans, forcing funds into crisis even if they claim the underlying assets are sound. Carlyle Capital's woes come after Peloton, a London-based hedge fund, was forced to liquidate its two funds and shut down because 14 lending banks had pulled credit lines.
William O'Donnell, a UBS government bond strategist, said markets were "utterly unhinged".
Margin calls also hit Thornburg Mortgage, a US lender, whose shares plunged yesterday after its failure to meet a call triggered defaults under other loan agreements. JPMorgan made the $28m call on a $320m loan to Thornburg, which has run short of cash at least twice since late August.
The Carlyle fund raised about $300m by selling shares in July and then used loans to buy the $21.7bn of securities. Carlyle Capital said it had sold almost $1bn of non-residential mortgage-backed assets to improve liquidity and reduce leverage since the credit crunch started in August. Carlyle Group has provided a $150m credit line to the fund, which is the limit of its exposure. Carlyle Capital reassured investors as recently as Monday that it had $2.4bn of undrawn credit lines.
Carlyle Group listed the fund on the Amsterdam Euronext exchange in July when the US sub-prime mortgage crisis was already gripping the market. It had to trim the IPO from a planned $400m and reduce the price of the shares.
Carlyle Group has more than $75bn under management In the 1990s, its advisers included John Major, the former prime minister, and George Bush, the former US president.
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