Carlyle heads for liquidation as creditors refuse bailout

14 March 2008

As creditors start liquidating the assets of Carlyle Capital, the Dutch affiliate of US-based private equity firm Carlyle Group,  it is clear the continuing global financial crisis claimed another well-known victim yesterday.

Carlyle Capital had defaulted on about $16.6 billion of debt and said its lenders could take possession of its remaining assets.(See: Carlyle Capital in default, faces liquidation)

So far, about $5.7 billion of the defaulted debt has been sold, the Carlyle Group said Thursday. The downfall of this feted name in financial circles had a domino effect worldwide as equity markets wiped out almost all the gains of two days earlier caused by the liquidity infusion by the Federal Reserve and other central banks.

Carlyle Capital had said that its talks with lenders had broken down after a drop in the value of its mortgage investments, which it said would result in margin calls of up to $500 million, including fresh demands of up to $97.5 million.

Shares of Carlyle Capital fell by more than 70 per cent on Thursday after the management declared on Wednesday evening its inability to reach an agreement with its lenders, and the possibility that the company's assets would be repossessed. This led considerable gap-down openings in Asian and European bourses on Thursday morning with US markets following suit. The negative sentiment is expected to persist for some days, led by shares of banks, mortgage and insurance firms.

Carlyle Capital is an Amsterdam-listed affiliate of the Carlyle Group, the private equity fund, and had been established in 2006 to make investments in US mortgage-backed securities. This was done with stated aim of diversifying from the leveraged buyout business in which the Carlyle Group was already a name to reckon with. Accordingly, it invested heavily in triple-A rated mortgage debt issued by Fannie Mae and Freddie Mac, and, like other investment vehicles, leveraged its capital aggressively, borrowing $31 for each dollar of equity.