When Even Agency-Backed MBS Investments Aren't Safe: A Look at Carlyle Capital
Carlyle Capital Corp., a listed mortgage bond fund managed by the private equity firm The Carlyle Group, is facing serious challenges as the credit crisis has ratcheted its way up to the top of the mortgage totem pole: agency-backed residential mortgage-backed securities. Housing Wire first reported on Carlyle Capital last week. In a press statement Monday, the fund said that "recent turmoil in the market for mortgage-backed securities" led the firm to face more than $400 million in margin calls from its lenders. It also said that the company's lenders have advised the firm of default under its credit facilities, putting the fund at serious risk of forced liquidation. "The Company believes that certain lenders may have liquidated in the open market the collateral securing approximately $5 billion of indebtedness," Carlyle said, noting no deficiency notices have yet been received by the fund. Remaining lenders hold roughly $16 billion in securities, the company said. "[I]f a mutually beneficial agreement is not reached, some of these lenders may also liquidate their securities," the release said. Agency yield spreads reached their highest level in more than 20 years last week as a sell-off in agency-backed MBS -- traditionally viewed as nearly risk-free -- dramatically drove down the prices of mortgage bonds backed by Fannie Mae and Freddie Mac. The fund leveraged $670 million in equity to finance a $21.7 billion portfolio of residential mortgage-backed securities issued by Freddie Mac and Fannie Mae. That's high leverage at 32 times equity; as high as that ratio sounds, one source suggested to Housing Wire that Carlyle isn't alone in leveraging purchases of agency-backed MBS. "There are probably a few more funds out there like this that have been reeling a little more privately," said one source, who asked not to be named.