It is beyond difficult to write a blog that purports to cover private equity and not mention (with some glee if you are in the middle market) the mounting woes that plague Carlyle in the face of daunting margin calls from lenders. Oops. Carlyle is, however, awfully lucky in that certain other Schadenfreude magnets have created a much larger media splash. One would almost think Carlyle had no influential enemies with media connections for all the press silence on the issue. Alea catches the quote of the year for private equity (and it's only March):
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....
Wow. What happened? We couldn't have seen this sort of thing anywhere else, could we?
Only slightly less amusing is this quote from Carlyle last week:
Carlyle said it had hired Olivier Sarkozy, half-brother of French President Nicolas Sarkozy, from investment bank UBS as it looks to "capitalize on the dislocation in the financial services sector."
Buy buying their own distressed assets at a discount, perhaps?
Breaking Views has a good piece on the fiasco. To wit:
Carlyle Capital's investment manager's report for January, shows its funds, amplified with heavy borrowing, were 99% invested in agency securities.
Where "agency securities" is Fannie Mae and Freddie Mac. Says Reuters today:
Carlyle said it has defaulted on about $16.6 billion of its debt and said the only assets held in its portfolio as of Wednesday were U.S. government agency AAA-rated residential mortgage-backed securities.
Carlyle Capital said that during the last seven business days the company had received margin calls in excess of $400 million.
I think that's it for them. Indeed, if their lawyers are worth their salt, a lot of these vehicles will be insulated, but this kind of damage goes deeper than pure legal liability. Indeed, Bloomberg quotes a Carlyle spokeswoman, who points out that the buyout operations of the entity are (mostly) quite distinct, with:
The Carlyle Group's only material financial exposure to CCC is through a $150 million unsecured subordinated revolving credit agreement with CCC.
But their reputation capital must at this point be totally depleted. Apparently they were leveraged in the neighborhood of 32:1. Oops. You can see that they knew this was a rather serious reputation issue in the tone of the death rattle they hissed forth towards the end:
The Dutch-listed company said U.S.-based buyout giant Carlyle Group participated actively in negotiations with lenders and was prepared to provide substantial additional capital if a successful refinancing could be achieved.
Carlyle Group managers have a 15 percent stake in the company.
It said negotiations deteriorated late on Wednesday when the pricing service used by certain lenders reported a drop in the value of the mortgage-backed securities collateral that is expected to result in additional margin calls on Thursday of approximately $97.5 million.
Ouch. Of course, astute Going Private readers will have taken my advice back in April, 2006:
Raising a distressed and special situations fund seems like a wise thing to do just now.
Art credit: "Tai," the painted elephant in the room in Banksy's September, 2006 exhibit, Los Angeles.