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Nye Lavalle

Carlyle Capital Aims to Halt a Meltdown
Leveraged Vehicle Seeks
'Stretchout' on Loans;
In a 'Purgatory Age'

March 8, 2008; Page B1

Conditions at Carlyle Capital Corp. had become so dire Thursday that Carlyle Group co-founder David Rubenstein raced back to Washington, D.C., that night from a Wall Street confab at the swank Deer Valley, Utah, ski resort.

Stepping off his Gulfstream jet, he encountered one of the biggest crises in his firm's 20-year history.

The world's largest banks had pulled support for Carlyle Capital, a European-listed vehicle that had bought $22 billion of mortgages. Loans on the portfolio of highly rated securities were in default, the lenders said. By early Friday, Carlyle Capital was fessing up to bigger problems, with still more margin calls threatening to "deplete its liquidity and impair its capital," the fund said in a statement. Trading in the fund has been suspended.

The developments are humbling for Carlyle Group, which has developed one of the world's most profitable and well-respected private-equity businesses. Investors and employees of Carlyle-owned businesses have flooded Carlyle's switchboard, looking for information and confused by the similar names. Carlyle Capital is 15% owned by Carlyle Group executives, and is managed by Carlyle Group executives from its Manhattan offices.

The crisis also reflects back on Wall Street, which helped create the situation by lending sums of money that mortgage-company analyst Matthew Howlett calls "astronomical."

A Carlyle spokesman said Friday afternoon that the fund remains in discussions with its lenders and Carlyle Group officials. Taking a leading role in the the negotiations are Carlyle Capital Chief Executive John Stomber, and board member James Hance, a former vice chairman of Bank of America.

A meeting among the fund's lenders is scheduled for Monday, at 10:30 a.m. in New York. The goal is what some market participants call a "stretchout," which replaces short-term debt with longer-term financing. "If Carlyle Group does not provide another backstop," Donald Fandetti, a Citgroup analyst, said it "could be forced into significant asset sales into a weak market or could face bankruptcy."

It looked like easy money at first. Carlyle Capital would exploit the difference between the interest earned on its investments in mortgage securities and the costs of financing those investments. The secret to making money was borrowing massive sums. Carlyle Capital managed only $670 million in client money, but used borrowings to boost its portfolio of bonds to $21.7 billion, meaning it was about 32 times leveraged. Market participants say that Carlyle Capital's leverage was on the high side.

With credit markets unraveling, the borrowing has proved to be Carlyle Capital's undoing. Lenders are requiring more collateral for loans, because of a decline in the market value of their mortgage assets. "They were maxed out on their leverage," or debt level, said Mr. Howlett, an analyst at Fox-Pitt, Kelton.

The fund's biggest creditors at year-end 2007 included Citigroup Inc. with repurchase agreements totaling $4.7 billion, Bank of America Corp. at $2.1 billion, UBS AG at $1.8 billion, and Deutsche Bank AG at $1.7 billion.

Complicating matters is Carlyle Group's longstanding importance to Wall Street. As a habitual buyer, seller, and financier of businesses, the firm gushes payments for the Street. Last year it paid out $330 million in investment-banking fees, according to Dealogic, a profile that would typically keep banks from making margin calls.

With the lending markets for large buyouts virtually shut, deal activity has slowed to a trickle. Speaking at World Economic Forum in Davos last month, Mr. Rubenstein said that the golden age of private equity was over. The industry had now entered its "purgatory age," he said. "We have to atone for our sins a bit."

Write to Peter Lattman at peter.lattman@wsj.com1 and Randall Smith at randall.smith@wsj.com2

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