March 10 (Bloomberg) -- Carlyle Group's mortgage-bond fund said creditors may force a sale of up to $16 billion of securities unless the two sides reach agreement on debt repayments.

The fund, started by David Rubenstein's private-equity firm less than a year ago, asked lenders to put further sales on hold after they sold collateral on $5 billion of debt, Carlyle Capital Corp. said in a statement today. It's meeting lenders to discuss more than $400 million of margin calls and is ``evaluating all options,'' the Guernsey, U.K.-based fund said.

Stung by about $190 billion of losses and writedowns from the subprime-mortgage collapse, banks are asking for extra collateral on even the safest debt. Carlyle Capital, which went public in July, used loans from a dozen banks including Citigroup Inc. and Deutsche Bank AG to buy about $22 billion of AAA rated mortgage debt. Even those bonds have slumped.

Carlyle's fund ``wasn't prepared,'' said Philip Keevil, a senior partner in London at Compass Advisers LLP and former head of European mergers at Salomon Smith Barney Inc. ``They hadn't started selling ahead of time and now they're having trouble liquidating their positions.''

The fund has said its agency debt issued by Fannie Mae and Freddie Mac has an ``implied guarantee'' from the U.S. government. It hasn't received so-called deficiency notices from lenders who've sold debt so far, it said.

Housing Turmoil

Carlyle increased mortgage investments last year, selling $300 million of shares in Carlyle Capital in the initial public offering. The fund delayed and then cut the size of the IPO by about 25 percent as the worst housing market in a quarter century began to bite.

It then added the money raised in July to a private $590 million pool opened in 2006. For every dollar of equity, the pool borrowed $32.

``Due to recent turmoil in the market for mortgage-backed securities, the company's lenders have significantly reduced the amount they are willing to lend against the company's portfolio of U.S. government agency AAA-rated residential mortgage-backed securities,'' Carlyle Capital said today.

Since March 5, lenders have told Carlyle Capital that they consider it ``in default under financing agreements,'' the release said.

Managers that trade fixed-income securities typically borrow money through repurchase agreements, or repos. In a repo, the security itself is used as collateral, just as a homeowner puts up the house as collateral for a mortgage.

`Vicious Cycle'

According to Carlyle Capital's annual report, lenders to the fund at the end of last year were Banc of America LLC, Bear Stearns Cos., BNP Paribas SA, Calyon, Citigroup, Credit Suisse Group, Deutsche Bank AG, ING Groep NV, JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and UBS AG.

``If people are forced to sell down, it will push market prices further down,'' said Philip Gisdakis, senior credit strategist at UniCredit SpA in Munich. ``We're in a vicious cycle.''

The fund plunged 58 percent to $5 in Amsterdam on March 6 after disclosing it couldn't meet lenders' demands for more collateral. The stock, which started trading at $19, has been suspended from trading since March 7.

``We're evaluating all options,'' Emma Thorpe, a Carlyle spokeswoman in London, said by telephone. ``Nothing has been ruled in, and nothing has been ruled out.''

Unless Carlyle Group provides additional financing, the fund ``could be forced into significant asset sales into a weak market or could face bankruptcy,'' Citigroup Inc. analysts including Donald Fandetti in New York wrote last week in a note to clients. Thorpe declined to comment on the Citigroup report.

Carlyle Group, the world's second-biggest leveraged-buyout firm by assets, has extended $150 million in credit to Carlyle Capital since August.

To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net

Last Updated: March 10, 2008 12:30 EDT