-- The global credit squeeze is denting the reputation of well-known private-equity firm Carlyle Group.
Carlyle Capital, one of Carlyle Group's investment units, said Thursday that its creditors are claiming assets since it is running low on cash. Carlyle Capital stunned investors after saying it was unable to work out a payment plan with its lenders.
Shares of Carlyle Capital, which went public on the Euronext Amsterdam exchange in July at $19, closed Thursday at 35 cents. In addition to embarrassing the seemingly infallible Carlyle Group, the failure of Carlyle Capital shows how professional investors' aggressive use of debt in recent years now haunts them.
Carlyle Capital borrowed more than $21 billion to finance a $21.7 billion bet on AAA-rated mortgage-backed securities. But as the value of the investments used as collateral has fallen, the lenders want to be repaid and Carlyle Capital can't come up with the cash.
"We're seeing a deleveraging of the world economy, and it will most hurt investors with the most leverage," says Dan Seiver, professor of finance at San Diego State University.
The Carlyle Capital debacle shook markets due to its potential ramifications for:
•Financial institutions. A dozen banks, including the who's who of Wall Street such as Bank of America, Citigroup and Merrill Lynch, lent to Carlyle Capital.
Investors in the banks immediately worried how many similar problems still loom and sold off the stocks. Much of the sell-off reversed during the day, but Bear Stearns bsc still closed $4.58 lower at $57, and Citigroup c down 14 cents at $21.07. "If the banks start taking securities back, they basically can't get rid of them," says Richard Bove, analyst at Punk Ziegel.
•Private-equity firms. Carlyle Group said the failure of Carlyle Capital would "not have a measurable impact on any of our other funds, investments and portfolio companies."
But Randy Katz of law firm Bryan Cave thinks private-equity firms, which use borrowed money to buy companies, may see more problems. Investors in private-equity funds will likely withdraw some of their money, he says. Also, private-equity funds will have a tougher time finding investments, he says.
Meanwhile, the companies that private-equity firms bought during the boom may strain under their debt loads due to the slowing economy, says Ricardo Chance of KPMG Corporate Finance. "If the companies (private-equity firms invested in) start to underperform, the assets will be worth less," he says.
But despite the early-day scare, when the Dow Jones industrial average was down more than 200 points, ratings agency Standard & Poor's came to the rescue when it said the big write-offs are near an end. "More subprime write-downs to come, but the end is now in sight for large financial institutions," the report said. The Dow ended the day up 36 points at 12,146.
But investors likely will still need to endure more blowups as risky funds fail, Chance says. "It's going to take a while to flush out."