Global Business

Credit-market Contortion Spurs Defaults

Carlyle London unit joins Thornburg Mortgage in reporting unmet margin calls.
Stephen TaubMarch 6, 2008

Contorted credit markets have taken another cruel twist — with subprime-related woes sparking margin calls at a London unit of the Carlyle Group and Thornburg Mortgage Inc., triggering default notices.

Carlyle Capital Corp., a publicly traded mortgage bond fund traded on the Amsterdam exchange, said it received additional margin calls from 7 of its 13 repo counterparties, totaling more than $37 million. So far, it met margin calls from three of these financing counterparties, but did not meet the margin requirements of the four other repo financing counterparties.

As a result, it has received one notice of default. It also said it expects to receive at least one additional default notice.

“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, said John Stomber, chief executive, president and chief investment officer of Carlyle Capital. “Unfortunately, this disconnect has created instability and variability in our repo financing arrangements.”

Stomber added that management is actively working with the company’s repo counterparties to develop “more stable financing terms.”

Earlier this week, Thornburg Mortgage, a single-family residential mortgage lender, said it received additional margin calls of $270 million on its reverse repurchase agreement borrowings. It conceded it has not met the majority of its most recent margin calls, but it is working to meet all of its margin calls by either selling portfolio securities or raising additional debt or equity capital.

“These margin calls are strictly the result of continued deterioration of prices of mortgage-backed securities precipitated by difficult market conditions,” the company stated, stressing they are not a reflection of the credit performance or long-term realizable value of Thornburg’s portfolio.

It stressed there is no assurance it will be able to sell assets or raise additional funds in the current market at acceptable prices, or to raise additional capital. “If the company is unable to satisfy outstanding margin calls, any or all of its reverse repurchase agreement counterparties may declare an event of default and liquidate the pledged securities,” Thornburg warned.

To underscore how rapidly market conditions are changing, Thornburg said that as of Feb. 27 it had met all margin calls, including margin calls received between Feb. 14 and Feb. 27, in an amount in excess of $300 million, on its reverse repurchase agreements. The substantial majority of those related to the decline in valuations of its super senior mortgage securities backed by Alt-A mortgage loans. The significant majority of those margin calls was triggered because of continued excess supply of similar types of securities into the market.

It added that after meeting all its margin calls as of Feb. 27, it saw further continued deterioration in the market prices of its high quality, primarily AAA-rated mortgage securities, which triggered additional margin calls.

As a result of successfully meeting its Feb. 27 margin calls, the company said, it was left with limited available liquidity to meet its current margin calls as well as any future margin calls.