Carlyle Group, the major US private equity and investment firm, is expected to emerge relatively unscathed from the collapse of its affiliate mortgage fund, Carlyle Capital Corp, the latest high-profile victim of the ongoing credit crunch.
In a statement issued on Thursday, Carlyle Group announced that negotiations with lenders to refinance CCC's portfolio of US mortgage-backed securities (RMBS) had ended, and that it was unable to reach a deal with lenders to refinance the portfolio on sustainable terms.
As a result, it is expected that lenders will take possession of CCC’s remaining RMBS assets.
CCC, a publicly-listed company on Euronext Amsterdam, was set up by Carlyle Group in 2006 to provide "attractive risk-adjusted returns for shareholders by investing in a diversified portfolio of fixed income assets consisting of US government agency AAA-rated RMBS securities and leveraged finance assets".
However, by the time CCC came to list in July 2007, the liquidity crisis prompted by the implosion of US sub-prime mortgage market had already begun to spread, and the company experienced almost immediate financial difficulties."Unfortunately, extreme volatility and market movement during this liquidity crisis created a hostile environment for CCC and similar types of vehicles," the statement explained.
Carlyle Group said that it "took extraordinary measures to help CCC manage through its liquidity crisis," including providing a $150 million subordinated line of credit to the fund.
However, the group assured investors that its core business would be unaffected by the demise of CCC because of the loose connection between the two businesses. While individuals at Carlyle collectively own approximately 15% of the CCC's securities, it had the status of a separate legal and business entity, and the group itself did not directly own any of its stock.
"We believe it will not have a measurable impact on any of our other funds, investments and portfolio companies," the group affirmed.
"CCC’s defaults under its repurchase agreements with its lenders do not trigger cross-defaults for any borrowings by The Carlyle Group, any of its other investment funds or any of The Carlyle Group’s portfolio companies," it added.
CCC's shares plunged more than 87% to EUR0.35 in Amsterdam on Thursday in the wake of the announcement.
The Carlyle Group manages USD81.1 billion in 60 investment funds in buyouts, real estate, growth capital and leveraged finance across Africa, Asia, Australia, Europe, North America and South America.
Since 1987, the firm has invested USD43.0 billion of equity in 774 corporate and real estate transactions for a total purchase price of USD229.3 billion.
"We continue to work to generate what we believe are good returns for our investors from our many other funds and businesses spanning the globe," the group assured investors.
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