Margin calls from creditors are once again threatening the existence of alt-A lender Thornburg Mortgage Inc., and a highly leveraged private equity fund, Carlyle Capital, is in similar straights as it faces margin calls from creditors worried about the declining value of the fund’s investments in highly-rated mortgage backed securities backed by Fannie Mae and Freddie Mac.
The problems at Thornburg and Carlyle are the latest examples of how fears about declining home prices and rising delinquencies and foreclosures are affecting credit markets.
Thornburg’s margin call problems began Feb. 14, when Swiss bank UBS AG wrote down by $2 billion the value of $26.6 billion in alt-A mortgages. That prompted Thornburg’s creditors to press the company to put up more cash or collateral for its debts, which are backed by similar alt-A loans.
While Thornburg was able to raise enough cash and collateral to meet more than $300 million in margin calls it received in February, the lender has been hit with another round of demands and has defaulted on margin calls from creditors including Natixis Securities North America Inc., ING Financial Markets LLC, Goldman, Sachs & Co. and JPMorgan Chase Bank.
In a regulatory filing, Thornburg officials said Friday they have received nearly $1.8 billion in margin calls from creditors so far this year, and that $610 million remained outstanding as of March 6.
“These events have raised substantial doubt about the Company’s ability to continue as a going concern without significant restructuring and the addition of new capital,” the company warned investors, adding creditors had agreed to a temporary freeze on additional margin calls.
Although Thornburg said it had raised $488 million in capital, it acknowledged it could be forced into a fire sale of assets backed by adjustable-rate mortgage (ARM) loans and was taking a $427.8 million impairment charge to reflect potential losses.
The company has said that fears about delinquencies in subprime loans have caused secondary market investors to under price securities backed by alt-A loans, even though loans Thornburg has originated have low default rates.
Thornburg uses the securities as collateral to borrow money. When their value drops, creditors demand that the company find more cash or collateral to cover its debts.
“The mortgage financing market’s complete inability to differentiate and appropriately value superior AAA-/AA-rated mortgage securities from all other mortgage assets is as unprecedented as it is frustrating,” Thornburg Chief Executive Officer Larry Goldstone said in a statement.
Thornburg said it would restate earnings for 2007 to reflect the losses it faces if it is forced to sell assets at steep discounts to meet margin calls.
The lenders’ accounting firm, KPMG LLP, issued a letter saying Thornburg’s financial statements for 2006 and 2007 “should no longer be relied upon.”
KPMG said the financial statements “contain material misstatements associated with available for sale securities” and that its auditors’ report “should have contained an explanatory paragraph indicating that substantial doubt exists relative to the company’s ability to continue as a going concern for a reasonable period of time.”
In a similar but unrelated development, a private equity fund has been forced to sell billions in AAA-rated mortgage-backed securities (MBS) guaranteed by Fannie Mae and Freddie Mac in order to meet margin calls.
Carlyle Capital announced today that its creditors have liquidated MBS that served as collateral for $5 billion in debt to cover more than $400 million in margin calls. Creditors who hold another $16 billion in MBS may liquidate them if ongoing negotiations fail, the company said.
The sales have flooded the secondary market for mortgages with securities backed by Fannie and Freddie, depressing prices and raising yields.
The Washington Post reported today that the founders of Carlyle Capital’s parent company, Carlyle Group, are negotiating with a consortium of banks to keep the fund afloat.
The banks provided loans that allowed Carlyle Capital to leverage its cash investments by a factor of more than 30 times, the Post reported.
With that much leverage, declines in the value of collateral backing the loans can quickly trigger margin calls that exceed the amount of cash invested in the fund, which the Post said totaled $670 million at its inception in August.
In an attempt to ease the credit crunch in financial markets, the Federal Reserve announced Friday it would increase the amount of short term funding it available to banks through an auction process this month to $100 billion, up from $60 billion in January and February.
The term auction facility (TAF) offerings allow banks to borrow money at low interest rates that are determined by competitive bids. The Fed said the auctions — introduced in December because banks were thought to be wary of the stigma of borrowing money at the discount window — will continue for at least another six months, the Fed announced.
The Federal Reserve said it is also initiating a series of 28-day term repurchase transactions, in which financial institutions may put up any securities, including Treasurys, agency debt, or agency mortgage-backed securities, that are eligible as collateral in conventional open market operations. The repurchase transactions are expected to total $100 billion this month, and could be increased “if conditions warrant.”