Trash Crash

Lenders to Carlyle Capital Corp. Ltd. have begun to liquidate securities held in its $21.7 billion portfolio and the fund said Friday it was considering "all available options."

The margin calls against Carlyle portend an ominous development one day after the fund was served with default notices, convulsing already skittish markets.

Shares in the fund, a listed mortgage-bond fund managed by private equity firm the Carlyle Group, were suspended Friday. The stock closed down Thursday almost 60 percent at $5.00 on Euronext Amsterdam.

Carlyle Capital said it received additional margin calls and default notices Thursday from banks that help finance its portfolio of residential mortgage-backed securities. It said it may not be able to meet the increased requirements.

The fund said it was unable to meet margin calls from four banks Thursday, raising fears that its entire portfolio could be unwound. Securities have dropped sharply in recent weeks as banks pull back on their lending, forcing investment vehicles and funds like Carlyle to dump assets.

In Friday's statement, Carlyle Capital said it had received "substantial additional margin calls and additional default notices from its lenders." It also said that lenders were selling off securities held as collateral.

Carlyle Group has a $150 million credit facility with Carlyle Capital.

"But we don't expect it to have any material impact" on the parent company, said Emma Thorpe, director of European communications.

Risk premiums on residential mortgage-backed securities widened Thursday, stocks fell, and U.S. Treasurys rallied as investors sought safety.

Carlyle Capital said Friday it is in continued discussions with its lenders about its financing situation, but warned shareholders that the additional margin calls and increased collateral requirements to keep funding in place could quickly deplete its liquidity and impair its capital.

Carlyle Capital leverages its $670 million equity 32 times to finance a $21.7 billion portfolio of residential mortgage-backed securities issued by U.S. housing agencies Freddie Mac and Fannie Mae.

To do this, it enters into repurchase agreements with banks, which involve posting the mortgage securities as collateral in exchange for cash.

If the value of the security held as collateral falls, the lender will ask for more collateral — a "margin call" — in order to secure the loan. If the borrower does not meet the margin call by putting up more collateral, the lender may sell the security.

Highly leveraged funds have become increasingly vulnerable because their cash cushions are tiny compared with actual assets.

Sudden price moves in the underlying assets can send margins spiraling, quickly depleting a fund's cash.

Carlyle Capital said Friday that, as of last week, it believed it had sufficient liquidity. It had reassured investors on its funding situation in is annual report Thursday, saying it had $2.4 billion in unused repo lines and a $130 million (84.86 million euros) liquidity cushion.

"In the past several days there has been a rapid and severe deterioration in the market for U.S. government agency AAA-rated residential mortgage-backed securities," Carlyle Capital said Friday.

The fund is managed by a unit of Washington D.C.-based Carlyle Group. It initially was launched as a private fund in 2006, then floated on Euronext Amsterdam in July.

Within weeks of the listing, it was forced to hit up the Carlyle Group for $200 million in emergency funding and it sold a $900 million loan portfolio at a loss to meet margin calls. Last week, Chief Executive John Stomber said the fund "can and will do better" after the difficulties in 2007.

Net asset value per share sank 30 percent last year, to $13.11 at Dec. 31 from $18.65 shortly before the listing. The stock, which had been offered at $19, also performed poorly, losing 37 percent before Thursday's announcement.