Distressed Pools Flood Market
Assets being dumped at fire sale prices.
The focus is back on mortgages as opportunistic buyers seize on loans out for bid by troubled sellers. The Wall Street Journal reports Carlyle Capital Corporation -- a unit of private equity firm the Carlyle Group -- missed a margin call on its $27.1 billion loan portfolio and may be forced to dump assets to pay back lenders. The company has just $670 million in equity supporting the portfolio, or a leverage ratio of 32 times.
Borrowing short to lend long doesn't work when chaos in short-term funding markets prevents borrowers from rolling over credit lines. Carlyle uses repurchase facilities (or repo lines) that act like lines of credit to finance its portfolio. The Journal reports that as early as Monday the firm assured lenders like Bank of America (BAC), Bear Stearns (BSC) and Citigroup (C) that its funding facilities were secure. Carlyle satisfied three of its seven margin requests, which totaled $37 million.
Repos are a common funding method for mortgage investors and often contain cross-default provisions, whereby a borrower is forced into default on multiple lines if it violates lending covenants on a single facility. This protects lenders in the event a portfolio starts to go sideways.
The news spooked investors after forced selling has rocked numerous mortgage companies in the past week. Thornberg Mortgage (TMA) shares have tumbled in recent days after the firm had trouble selling assets to meet margin calls in excess of $300 million. In addition, Marketwatch is reporting that UBS (UBS) sold $24.1 billion of Alt-A mortgages to Pimco at a 30 point discount to par. That a portfolio of such size sold at just 70 cents on the dollar is indicative of a market in need of buyers.
Just as equity investors look for capitulation selling to indicate a bottom, forced selling is often a sign markets are healing themselves. However, many argue that such low prices should be blamed on liquidity, rather than assets' underlying credit quality. And while this argument may have some merit, the always astute Minyan Peter offered yesterday on the Buzz & Banter that "in a deflationary environment, liquidity trumps all other cards in the deck. Credit wounds. Liquidity kills."
The information on this website solely reflects the analysis of or opin=
=3D =3D3D ion about the performance of securities and financial markets by =
the wr=3D iter=3D3D s whose articles appear on the site. The views expresse=
d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi=
a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web=
site is intended to con=3D stitute a recom=3D3D mendation or advice address=
ed to an individual investor =3D or category of inve=3D3D stors to purchase=
, sell or hold any security, or to =3D take any action with re=3D3D spect t=
o the prospective movement of the securit=3D ies markets or to solicit t=3D=
3D he purchase or sale of any security. Any inv=3D estment decisions must b=
e made =3D3D by the reader either individually or in =3D consultation with =
his or her invest=3D3D ment professional. Minyanville write=3D rs and staff=
may trade or hold position=3D3D s in securities that are discuss=3D ed in =
articles appearing on the website. Wr=3D3D iters of articles are requir=3D =
ed to disclose whether they have a position in =3D3D any stock or fund disc=
us=3D sed in an article, but are not permitted to disclos=3D3D e the size o=
r direct=3D ion of the position. Nothing on this website is intende=3D3D d =
to solicit bus=3D iness of any kind for a writer's business or fund. Mi=
ny=3D3D anville mana=3D gement and staff as well as contributing writers wi=
ll not respo=3D3D nd to em=3D ails or other communications requesting inves=
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter