Carlyle Has to Prop up Listed Fund with Second Loan

Private equity firm, Carlyle Group, has had to make a second loan ($100 million) to its Carlyle Capital Corporation [CCC] unit after CCC lost a bucket of money. Having been a publicly traded entity since July 4, on the Euronext Amsterdam exchange, CCC has come under shareholder attack for losing the money but also for poor communications. Throw in excessive concentration in the US mortgage-backed securities market and leverage, and one has a recipe for financial unpleasantness.

According to the Financial Times, “CCC, which is heavily leveraged, invested 95 per cent of its funds in AAA-rated residential mortgage-backed securities issued by Fannie Mae and Freddie Mac, the US government-sponsored mortgage finance institutions.” Leverage is great if one is on the right side of the trade, but anyone in US mortgages these days is probably not. CCC is in that rapidly sinking boat.

To help keep itself afloat, the company also sold off $900 million in assets to cover margin calls (ain’t leverage swell?). When investors asked for details, the bigwigs should have picked up the phone, but instead, they relied on their press releases and website. “Because CCC has publicly traded securities and is subject to various rules and regulations pertaining to selective disclosure, we relied on our press releases and our website instead of communicating directly with individual shareholders,” a company statement said. John Stomber, chief executive of CCC, added, “We understand these efforts have been unsatisfactory and frustrating to many of you. We sincerely apologise for this lapse in communication.” Shareholders weren’t all that happy, and the stock is now at $14 a share, down from the IPO price of $19, which itself was lowered from Carlyle's desired price of around $24..

Having sold off those assets at a $30-40 million loss, the company expects red ink in the third quarter. In the first six months of 2007, CCC reported a net income of $33.4 million. Mr. Stomber said: “This additional liquidity will help us better weather the market conditions we are facing.” In other words, there could be more trouble ahead.

According to the FT, CCC’s business model was designed “to withstand a liquidity event equal to the events of October 1998 when the demise of Long Term Capital Management threatened the financial markets.” CCC added in a statement: “We believe the recent liquidity disruption is significantly worse than the events of 1998.” The news is bad, but at least they seem to be communicating.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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