Carlyle fails in Negotiations, Banks may seize Assets

Carlyle Capital Corp. plunged low after declaring it expects lenders to seize all its assets as its attempt to convince banks to refinance the fund, failed. Shares dropped more than 70 percent on Thursday. They have fallen more than 90 percent since the company unveiled its problems last week.

The Amsterdam-listed affiliate of the Carlyle Group said it “has not been able to reach a mutually beneficial agreement to stabilize its financing.”

As of February, Carlyle had $21.7 billion worth of assets in its investment portfolio. More than $5 billion of its securities have already been sold, and the fund tried, in vain, to negotiate with the banks to prevent the liquidation of the remaining $16 billion.

The announcement raised fears that more funds, even those investing in highly-rated assets, could run into trouble.

More than a year ago, the fund leveraged its $670 million equity 32 times to finance a $21.7 billion portfolio of triple A-rated mortgage debt issued by Freddie Mac and Fannie Mae. At least a dozen banks and firms, including Bank of America Corp., Citigroup Inc. and Merrill Lynch & Co. lent the money.

Carlyle posted the securities as collateral under repurchase agreements, so in case the value of the securities drops, the lender can ask for more collateral — a margin call — to secure the loan. If however, the borrower fails to meet the margin call, the lender may be allowed sell the security.

Mortgage-backed securities’ value plummeted due to the slump in U.S. housing market and foreclosures surged, and the banks began to ask Carlyle for more than $400 million in additional capital. The fund failed to raise the sum, prompting lenders to start foreclosing on the securities.

“It has become apparent to the company that the basis on which lenders are willing to provide financing against the company’s collateral has changed so substantially that a successful refinancing is not possible,” Carlyle Capital said in a statement late on Wednesday.

Trading of the fund's shares was suspended last week after it dropped more than 50 percent to $5 a share after the announcement that it wasn't able to meet the margin calls.