It’s been a short and unhappy life so far for Carlyle Capital. After listing last July the mortgage-backed securities fund, a so-called permanent capital vehicle for private equity group Carlyle, almost immediately hit trouble.
Its share price slid, and it had to turn to its namesake for help in meeting margin calls in August - twice. Unfortunate and embarrassing for Carlyle, who were forced to apologise for lapses in communication when investors started asking more probing questions about the fund’s difficulties.
Carlyle Capital’s fortunes haven’t improved. It has now missed margin calls from four of its repo counterparties and has received a default notice - with another thought to be on its way.
But the fund is still sticking to its original line - that its $21.7bn of investments in AAA-rated securities issued by Fannie Mae and Freddie Mac are good, carrying the “implicit guarantee of the US government”. They’re being mis-assessed by their counterparties.
In fact, it looks like a stand-off. Carlyle has already paid out $60m in margin calls since the beginning of the month but:
However, on March 5, the Company received additional margin calls from seven of its 13 repo counterparties totaling more than $37 million. The Company has met margin calls from three of these financing counterparties that have indicated a willingness to work with the Company during these tumultuous times, but did not meet the margin requirements of the four other repo financing counterparties.
There’s bad blood between funds and their banks. And aggrieved Carlyle seems to be picking who it pays. Peloton has pointed to the doubling or tripling of cash required to be put up for loans in its own demise. Of course, everyone thinks they should be the exception as the banks turn off the liquidity spigot. After all, only a couple of weeks ago we were being told that all would be well this time round, as prime brokers and lenders would be more discerning in pulling the rug from under hedge funds.
Carlyle Capital’s CEO said:
The last few days have created a market environment where the repo counterparties’ margin prices for our AAA-rated U.S. government agency floating rate capped securities issued by Fannie Mae and Freddie Mac are not representative of the underlying recoverable value of these securities. Unfortunately, this disconnect has created instability and variability in our repo financing arrangements. Management is actively working with the Company’s repo counterparties to develop more stable financing terms.
The signs are that the market for any variety of credit, nop notch or sub standard, is spooked. Rumours that UBS is disposing of Alt-A securities at a heavy discount adds to the general sense of credit unease.
One point of note in the Carlyle statement is that it now say it has sold almost $1bn in non-RMBS assets since last summer. But the fund got shot of $900m last August, suggesting that it has only managed to shift a further $100m since that time. The losses from those sales pushed the fund to a third quarter net loss of $34.2m. The absence of further sales at depressed prices might explain how it notched up income of $17.6m in the final quarter of the year.
The speed at which its on hand resources are being eaten up by its counterparties demands does not bode well for the fund. It last week reassured on its funding, adding that as of February 27 the fund had $80m left available on its (increased) revolving credit line from Carlyle Group. To tap the unused repo lines of $2.4bn would be just to dig itself deeper into its current hole.
