The dominos continue to fall. Carlyle Capital Corp, unsurprisingly, has received “substantial additional margin calls and additional default notices from its lenders.”
Which is what happens when you confess to problems paying your bills, as your supposedly ultra-safe investments deteriorate rapidly. Shares in CCC were suspended on Friday, pending an additional statement. Either Carlyle Capital’s private equity namesake stumps up for its moribund credit fund, rustles up a deal with the banks, or the fund must be toast.
The market for debt issued by agencies like Fannie Mae, in which CCC invests its $21.7bn portfolio, has become “utterly unhinged” according to one strategist. But the lunatic tendencies of the credit markets aren’t the issue. Banks aren’t in the mood for favour or exceptions, and are demanding increased collateral as spreads on these securities widen.
The speed at which the highly leveraged, mortgage-backed fund has become undone is remarkable.
Although the Company believed last week that it had sufficient liquidity, it was informed by its lenders this week that additional margin calls and increased collateral requirements would be significant and well in excess of the margin calls it received Wednesday. The Company believes that these additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital.
Fire sales are now a reality. Some of the fund’s repo counterparties have already liquidated their holdings and, CCC said on Friday with some understatement, “it is possible that additional securities may be liquidated by the lenders.”
The case has echos of LTCM, notes Felix Salmon. Its problem isn’t risky securities; its system-wide spread widening and flight to liquidity, combined with outsize leverage, at about 32 times.
Carlyle Group is in a bind. Its fund’s survival is entirely at the mercy of the banks. Those banks stood to lose out themselves if a monoline went under, through further large writedowns as wrapped securities were downgraded. There’s no such pressing incentive here, bar maintaining a broader relationship with Carlyle. And that relationship isn’t really the concern of the repo desks making the demands.
Related links
Banks call time as Carlyle fails to meet margin calls - FT Alphaville
Fannie Mae CDS - Alea
Gloom set to worsen as threat of spiral grows - FT.com
