Carlyle's Global Meltdown

Dutch-Traded Fund Moves Toward Collapse
By JULIA WERDIGIER

LONDON — David M. Rubenstein, co-founder of the Carlyle Group, pledged on Thursday to “make amends” to investors in a fund that has ties to his firm and is facing collapse.

“We’re working to find ways to help people to deal with losses and maybe recover some capital,” Mr. Rubenstein said in a telephone interview.

The fund, Carlyle Capital, came to the brink of collapse on Thursday after discussions on refinancing failed, prompting a default on its debt. The fund’s inability to strike a deal in talks with creditors late Wednesday, despite help from Mr. Rubenstein and the Carlyle Group’s strong ties to lenders, sent renewed shudders around global markets. Investors fear that more funds will run into trouble as clients seek withdrawals.

“I thought we’d work out a way to solve the problem but each of the banks were so worried about their own credit situation,” Mr. Rubenstein said. “The result is not a happy one. Over 20 years we had good investment judgment, but we’re not infallible.”

Mr. Rubenstein said that the banks recognized this was “an unusual situation” and he did not expect the fund’s collapse to have any repercussion on the Carlyle Group’s relationships with the lenders, which include most Wall Street banks. The Carlyle Group shares some investors with the fund, which is run by Carlyle Group executives who also own about 15 percent of the fund, but Carlyle Group does not own any of its assets.

Carlyle Capital said Thursday that it expected lenders to take possession of its remaining assets, a portfolio of United States residential mortgage-backed securities rated AAA.

“If banks are unwilling to lend, then this is the lifeblood of capitalism being restricted,” said Justin Urquhart Stewart, co-founder of 7 Investment Management in London. “Hedge funds and other weaker operations are being broken like people stepping on twigs.”

Carlyle Capital’s problems also provide a glimpse into the challenges faced by the usually secretive hedge fund industry because, unlike most such funds, Carlyle Capital is publicly listed. The situation has also raised questions about the vulnerability of the privately held funds, which disclose little data.

Carlyle Capital joins a number of funds that have run into trouble this year after banks hit by write-downs on assets backed by subprime mortgages started to call in loans or asked for better collateral.

Among the funds that are struggling, Peloton Partners, a hedge fund in London run by former Goldman Sachs partners, was forced to liquidate its largest funds last month. Thornburg Mortgage, a major American lender, also ran into trouble after it failed to meet some margin calls, and Drake Management in New York said that it might shut its largest hedge fund.

Some investors say they believe that attempts by central bankers to inject funds into the banking system may not be enough to revive markets.

“It’s a confidence issue,” said Irfan Younus, a banking analyst at NCB Stockbrokers. “People are still nervous, and banks are reluctant to lend more because they’re in the process of deleveraging.”

Last month, Carlyle Capital was managing $21.7 billion in assets— mostly triple-A rated mortgage debt issued by Freddie Mac and Fannie Mae. Like many of its peers, it had leveraged itself aggressively, borrowing $31 for each dollar of equity, according to its annual report. Lenders include Deutsche Bank, Bear Stearns, Merrill Lynch and JPMorgan Chase.

As those investments lost value and banks worried about their debt exposure, creditors demanded that Carlyle Capital put up more and more funds as collateral for the loans. A $150 million credit line from its parent, the Carlyle Group, was not enough to keep it out of trouble.

By Wednesday, it had defaulted on about $16.6 billion of debt and some lenders started to liquidate assets.

Talks to halt liquidations and revive the fund failed late Wednesday after the value of collateral declined further, prompting an additional $97.5 million in margin calls.

The fund’s shares, which were first offered in July 2007 and are traded on the Amsterdam Stock Exchange, are now worth 43 cents each, compared with $19 when they started trading last summer. They have dropped more than 90 percent since the company’s problems became public last week.

In a statement Wednesday, the Carlyle Group stressed that it had not purchased any of Carlyle Capital’s securities and was linked to the fund only by name, the credit line and the fact that about 15 percent of the fund’s securities are owned by Carlyle Group employees. The fund is run by John C. Stomber, a managing director at the Carlyle Group and a former executive at Cerberus Capital Management.

March 14, 2008