Trading in Carlyle Unit Suspended

By Thomas Heath and Howard Schneider
Washington Post Staff Writers
Friday, March 7, 2008 8:50 AM

Trading in Carlyle Capital was suspended on a Dutch stock exchange today as the company announced that some of its lenders had begun forcing the sale of assets and others had delivered new demands for cash and collateral that could "quickly deplete" its available resources.

Carlyle Capital, a publicly traded financial fund managed by the District-based Carlyle Group, this week became a barometer for broader troubles in the mortgage and credit markets when it announced that lenders were writing down the value of its high-grade investments in U.S. mortgages and issuing "margin calls" -- demands for more collateral -- to protect themselves.

Carlyle Capital's announcement helped drive U.S. stock exchanges lower by roughly 2 percent yesterday. Also raising fresh concerns about the U.S. economy, the Mortgage Bankers Association reported that foreclosures on U.S. home mortgages had reached an all-time high, and concern spread that even the value of loans backed by mortgage giants Fannie Mae and Freddie Mac had become suspect.

Foreign markets followed the U.S. markets lower overnight. Asian exchanges were off by roughly 3 percent, and major European markets were down by around 1 percent. Wall Street was waiting today for a closely-watched report on unemployment.

Carlyle Capital in the last week has received a succession of demands from its lenders. The latest round came yesterday, the company said in a news release this morning, and more may be on the way. In addition, the company said that some of its lenders had begun forcing the sale of investments they had helped underwrite, and "it is possible that additional securities may be liquidated."

The news release did not discuss the dollar value of the assets that have been liquidated, or the amount of additional cash and collateral that the company's 13 lenders expect it to post in coming days. As of Wednesday, before the latest round of demands, lenders had asked for roughly $97 million, some of which the company had been unable to raise -- leading to one notice of default and the expectation of another, according to the company.

With trading in the company suspended on Amsterdam's Euronext exchange, after a nearly 60 percent drop in the value of Carlyle Capital yesterday, the latest news release sounded a dark note.

"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 those already received, the company said. "The Company believes these additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital."

The company said it was "in continuing discussions" with its lenders about the situation.

Allied with Carlyle Group, the highly successful District-based private equity firm, Carlyle Capital went public in July on the Amsterdam exchange, trading at roughly $20 a share. Using $670 million in cash, the company had leveraged enough debt to build a portfolio worth 32 times that amount -- or roughly $21.7 billion before the recent trouble began. Its stock closed yesterday at $5 a share.

The devaluation of Carlyle's holdings in AAA-rated home-mortgage-backed bonds from Fannie Mae and Freddie Mac reflects the spreading turmoil in the capital markets, which is infecting even the highest-rated securities.

Similar securities are being traded on markets at below their face value, which is one of the reasons Carlyle Capital's banks asked the company to inject more cash.

Over the past year, lenders also increased the fees they charge Carlyle Capital, hurting its ability to pay. Some fees have risen from 1 percent of the loan to 3 percent, which can amount to hundreds of millions of dollars more on $20 billion in debt.

"This may be the first of many negatives for blue-chip firms," said William L. Walton, chairman of Allied Capital, a business-development company in the District. "I don't see this as a Carlyle-specific issue particularly. The larger issue is that most small, publicly traded financial firms are seeing their liabilities under pressure. I would expect Carlyle will manage their way through this."

James J. Angel, associate professor of finance at Robert E. McDonough School of Business at Georgetown University, said the extent to which Carlyle's brand is damaged will depend on Carlyle Capital's outcome.

"Just getting a margin call is not that big a deal," Angel said. Carlyle Capital "may have losses on paper at the present, but it could be a very good investment in the long run. If they can meet the margin calls and if history shows it was a good trade after the fact, this situation may actually burnish [Carlyle Group's] reputation."

A financial rescue may have to come from Carlyle Group, which has put $150 million into Carlyle Capital in the past year. The world credit crisis first hit Carlyle Capital last summer.

Carlyle Group spokesman Chris Ullman said yesterday that while the outlook for Carlyle Capital is unclear, the private-equity firm has limited exposure.

Money from Carlyle Group investors, mostly pension funds, sovereign wealth funds and wealthy individuals, is not at risk in Carlyle Capital, Ullman said. Only owners' money, not buyout fund money, goes into Carlyle Capital, he said. Carlyle Group has $75 billion under management from investors around the world.

Donald B. Marron, founder of Lightyear Capital in New York and former chairman of PaineWebber Group, said Wall Street legends are made during crises like Carlyle's.

"Reputations in this business are made in the long term and . . . enhanced by how you deal with troubled times because everyone has trouble at one time or another," Marron said. "I expect [Carlyle] to deal with this extremely responsibly."