By Thomas Heath
Washington Post Staff Writer
Tuesday, March 11, 2008
Carlyle Group's three co-founders are considering a plan to pump new money into an ailing foreign affiliate to rescue it from possible insolvency, according to sources familiar with the talks.
The investment by William E. Conway Jr., David M. Rubenstein and Daniel D'Aniello is intended to help meet the demands of Carlyle Capital's lenders, which want additional collateral to protect against the chance that the unit's portfolio of high-grade mortgage-backed securities might be worth less than expected.
The sources spoke on the condition of anonymity because of the sensitive nature of the talks. They said that in addition to a possible investment, the company is exploring whether alternative forms of collateral might be available or whether it might be able to tap a new line of credit. Forbes magazine last year estimated Carlyle's three founders to each be worth about $2.5 billion.
"There are ongoing discussions, and no conclusions have been reached," said Carlyle Group spokesman Chris Ullman.
The problems at Carlyle Capital have become a preoccupying concern for the top leaders at the Carlyle Group, a District-based private-equity firm that uses cash from its wealthy clientele to buy and sell companies and make other investments.
Rubenstein, Conway and others have been in successive meetings with lenders in an effort to resolve Carlyle Capital's problems, not only to protect their own investment but also to preserve Carlyle Group's Midas-touch reputation.
Carlyle Capital is incorporated on Guernsey, an island in the English Channel, and is traded on Amsterdam's Euronext exchange. The company was set up in August 2006 with roughly $670 million in cash from Carlyle's owners and other investors, and about $300 million in additional capital raised from the public sale of stock.
The capital allowed the company to go to banks and borrow far more, leveraging its cash investment some 20 times into the portfolio valued recently at $21.7 billion.
Though focused on AAA-rated mortgage-backed securities issued by Fannie Mae and Freddie Mac -- traditionally considered secure and conservative investments -- the company's prospects have been dimmed by the same doubts that have upended securities linked to riskier subprime mortgages, namely whether the underlying assets were losing value and whether the homeowners would continue to make their payments.
As the market value of the Fannie Mae and Freddie Mac securities has dropped, Carlyle Capital's lenders have asked the company to increase its cash equity from what was 1 percent to as much as 5 percent. An increase of that amount on $20 billion in loans amounts to several hundred million dollars.
The Carlyle Group last summer loaned Carlyle Capital $150 million to cover debt obligations. Yesterday, Carlyle Capital said in a news release that some of its 13 lenders had demanded it post $400 million in additional collateral.
Some lenders have already declared the company to be in default of its financing agreements with them. The company said its lenders might have sold off as much as $5 billion in assets used as collateral for loans -- an amount equal to nearly 25 percent of Carlyle Capital's holdings.
By kicking in additional cash or finding another form of collateral, Carlyle's founders hope to preserve about $12 billion of the $21.7 billion in assets it once held, sources said.
One person involved in the talks with the banks said the scaled-down company should still preserve "a significant amount of shareholder investments."
Ullman said none of the money used to help Carlyle Capital so far has come from other Carlyle Group funds or from the firm's clients.
"We believe that the challenges facing [Carlyle Capital] will have no measurable impact on any other fund sponsored by the Carlyle Group," Ullman said.
Two of the three co-founders, Conway and Rubenstein, were in New York on Monday, accompanied by a team of Carlyle Group insiders who are trying to negotiate a "stand-still" agreement with lenders while they work out a financial solution.
The stand-still agreement would stop lenders from foreclosing on loans they have made to Carlyle Capital.
Trading in Carlyle Capital has been suspended since Friday, when its shares plummeted 60 percent, to $5 a share.
Carlyle Capital said in a statement that it was awaiting responses from the lenders.
Staff writer Howard Schneider contributed to this report.
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