Roach Infestation

Carlyle Capital Corp., the publicly traded credit fund private-equity firm Carlyle Group started last year to invest in AAA rated mortgage securities, failed to meet margin calls and said it received a notice of default.

Carlyle Capital missed four of seven margin calls yesterday totaling more than $37 million, the Guernsey, U.K.-based fund said today in a statement. The fund expects to get at least one more notice of default related to the margin calls.

The collapse of the subprime mortgage market has prompted investors to flee all but the safest forms of debt, leading to the failure of hedge funds including Peloton Partners LLP. The Carlyle fund raised $300 million in July and used loans to buy about $22 billion of AAA rated so-called agency mortgage securities issued by issued by Fannie Mae and Freddie Mac.

``The credit crisis is spilling over to the next asset class, agency bonds,'' said Philip Gisdakis, senior credit strategist at UniCredit SpA in Munich. ``There's never just one cockroach. If you see one highly leveraged hedge fund going bust, then there's another on the way.''

Peloton, the London-based hedge-fund firm run by former Goldman Sachs Group Inc. partners, announced plans last week to liquidate its ABS Fund after ``severe'' losses on mortgage-backed debt and demands from banks to repay loans. Thornburg Mortgage Inc. in Santa Fe, New Mexico, plummeted 62 percent in New York trading this week after the home lender received a default notice on a $320 million loan.

Widening Spreads

Carlyle Capital, run by John Stomber, fell 1.7 percent in Amsterdam trading today to $11.80. The fund originally sold shares at $19 each. Emma Thorpe, a spokeswoman for Carlyle Group in London, declined to comment.

The agency mortgage-bond market has about $4.5 trillion of securities, according to estimates from UniCredit. The spread between 30-year agency mortgage bonds and 10-year U.S. Treasuries widened to more than 200 basis points yesterday, the highest since 1986, according to Bloomberg data cited by UniCredit today.

At the same time, money-market rates for euros and pounds climbed to the highest since mid-January, signaling the global squeeze on short-term bank lending may be returning. The three- month London interbank offered rate, or Libor, for euros advanced 1 basis point to 4.4 percent yesterday, the highest since Jan. 18, according to the British Bankers' Association.

``Market conditions are the worst anyone in this industry can remember,'' said Alain Grisay, chief executive officer of London-based F&C Asset Management Plc, on a conference call with reporters today. ``I don't think anyone has a recollection of a total disappearance in liquidity. I just cannot remember a time when for six months there are billion of dollars worth of assets out there for which there is just no market.''

Market `Disconnect'

The Carlyle fund said in today's statement that margin prices requested for securities weren't ``representative of the underlying recoverable value'' of the notes. ``Unfortunately, this disconnect has created instability and variability in our repo financing arrangements,'' Stomber said.

Carlyle's counterparties are Wall Street firms, which use repurchase agreements to lend money and require securities be put up as collateral. As the perceived credit worthiness of asset- backed bonds declined, the amount of money that can be borrowed using them as collateral fell.

``Management is actively working with the company's repo counterparties to develop more stable financing terms,'' Stomber said in the statement. Since filing its annual report a week ago, Carlyle Capital has met margin calls and additional collateral requirements of more than $60 million, it said.

Dividend Cut

Carlyle said last month its agency mortgage securities ``have the implied guarantee of the U.S. government and are expected to pay at par at maturity.''

Carlyle Capital has sold almost $1 billion of non- residential mortgage-backed securities to cut debt since August and received a $150 million credit line from Washington-based parent Carlyle Group.

The Carlyle fund eliminated its dividend and waived an incentive fee on Feb. 28 when it reported quarterly financial results, seeking to build liquidity as mortgage defaults in the U.S. rise.