Defaults at Carlyle Capital, Thornburg

123jump.com Staff
06 Mar, 2008
New York City

U.S. stocks edged lower as mortgage securities related defaults fears spread to stocks. Thornburg received a default notice from JP Morgan which triggered other defaults of $320 million. Thornburg stock is now down 95% from its recent peak in July 2007. Carlyle Capital, a listed investment management company in London, controlled by Carlyle Group in Washington, received mortgage debt related default from one of its 13 lenders.

[R]11:00AM New York, 4:00PM London – U.S. stocks fell sharply after new credit market defaults dragged financial stocks lower.[/R]

Financial stocks led the U.S. market averages lower after new worries of fire sale of subprime securities resurfaced. Merrill Lynch, Bear Stearns, Lehman Brothers, and UBS fell sharply in the first 90 minutes of trading.

Thornburg Mortgage ((TMA)) in a regulatory filing suggested that it has received JP Morgan default notice which has triggered default on other loans. The SEC filing noted, “The letter also notified the company that JPMorgan will exercise its rights under the Agreement. The aggregate amount of proceeds lent to the company under the Agreement was approximately $320 million.

The company’s receipt of the notice of an event of default has triggered cross-defaults under all of the company’s other reverse repurchase agreements and its secured loan agreements. The company’s obligations under those agreements are material.”

Thornburg stock fell $2.00 to $1.39.

If the company fails to meet its lending requirement bankruptcy may be the only alternative left.

Separately, Carlyle Mortgage fund, listed in the UK and managed by a private equity fund Carlyle Group in Washington, today announced that since filing its annual report on February 28, 2008, the Company has been subject to margin calls and additional collateral requirements totaling more than $60 million.

Until March 5, the company had met all of the margin requirements imposed by its repo counterparties. However, on March 5, the Company received additional margin calls from seven of its 13 repo counterparties totaling more than $37 million.

The company has met margin calls from three of these financing counterparties that have indicated a willingness to work with the company, but did not meet the margin requirements of the four other repo financing counterparties.

The company with capital of $670 million has a loan to capital ratio of 32 to 1 with a portfolio of $21.7 billion of residential mortgage backed securities issued by the U.S. backed lending agencies of Fannie Mae and Freddie Mac.

Since the liquidity crisis in global fixed income markets started in August, the Company has sold almost $1 billion in non-RMBS assets to improve liquidity and reduce leverage. The company recently received $150 million of revolving loan facility from its parent group in emergency funding.

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

He suggested that current prices of its underlying securities are not representative of its underlying values and this has created instability and variability in repo financing arrangement.

In a letter to shareholders dated December 31, 2007 Stomber highlighted decline in asset backed commercial paper, write-down of the collateralized obligations, and the third leg of downside from the corporate loan default rates due the economic recession.

He went on to add that, “We are now positioned to benefit from the third down leg I described. Historically, AAA U.S. Agency capped floating rate securities issued by Fannie Mae and Freddie Mac perform well during a recessionary economy.

During past economic slowdowns, these securities benefit from “a flight to quality” since investors perceive the implied guaranty of the U.S. government to eliminate credit risk. Furthermore, interest rates typically fall in a recessionary economy, which increases the value of these securities.”

He further specified on page of 4 of the annual report dated December 31, 2007 that “It should be noted that while we expect prepayments speeds to increase, the expected rate of increase of new speeds will be tempered by the lower housing prices and weak economic conditions. In general, increasing prepayment speed will increase the value of securities we own because our securities are held at a discount to par.”