Margin Calls Throttle Thornburg
By DONNA KARDOS
March 7, 2008 2:08 p.m.
In the latest sign of how badly firms have been hurt by the credit crunch Thornburg Mortgage Inc. Friday said there is “substantial doubt” about its ability to continue as a going concern, citing deterioration of prices of mortgage-backed collateral and a liquidity position under unprecedented pressure.
Thornburg issued the warning amid an announcement that the lender will restate financial statements for the past two years to recognize write-downs on assets that may result in a $427.8 million charge for 2007.
Picking CCC as your ticker symbol when you are listing a fund that invests in debt tempts fate. That is what private-equity shop Carlyle Group did when it floated Carlyle Capital Corp. in Amsterdam. The fund invests in AAA-rated bonds backed by Fannie Mae and Freddie Mac, the U.S. mortgage giants. Having borrowed 32 times the amount of equity in the fund by the end of 2007, there wasn’t much cushion against the margin calls that are now coming in.
Many hedge funds borrow heavily, but banks now are increasingly cautious about lending. If a fund’s creditors decide they want to offer less debt or hold more collateral against trades, it can lead to forced asset sales. If the fund’s trades happen to be losing money, too, the result can be a vicious spiral.
Carlyle Capital is struggling to meet calls from financing counterparties for more collateral to back up that debt. Its $21.7 billion portfolio was supported by just $670 million of net assets at the end of last year. Carlyle Group has lent the fund some money a credit facility recently upped to $150 million to help ease its cash crunch. The fund held back on paying a dividend last quarter. It says it also has sold $1 billion of assets since August.