March 6 (Bloomberg) -- Carlyle Group's publicly traded mortgage bond fund failed to pay margin calls, prompting creditors to seek immediate repayment, as the burning subprime mortgage market scorches investors in even the highest-rated debt. The stock fell 58 percent.

Carlyle Capital Corp. missed four of seven margin calls yesterday totaling more than $37 million, the Amsterdam-listed fund said today in a statement. The company expects to get at least one more notice of default related to the margin calls.

Started by David Rubenstein in 1987, Carlyle expanded its mortgage investments last year, selling $300 million of shares in Carlyle Capital. The fund used loans to buy about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac, securities that Carlyle says have the ``implied guarantee'' of the U.S. government. Even those bonds have slumped, leading to the failure of hedge funds led by Peloton Partners LLP.

``The credit crisis is spilling over to the next asset class, agency bonds,'' said Philip Gisdakis, senior credit strategist at UniCredit SpA in Munich. ``There's never just one cockroach. If you see one highly leveraged hedge fund going bust, then there's another on the way.''

Peloton, the London-based hedge-fund firm run by former Goldman Sachs Group Inc. partners, announced plans last week to liquidate its ABS Fund after ``severe'' losses on mortgage- backed debt and demands from banks to repay loans. Thornburg Mortgage Inc. in Santa Fe, New Mexico, plummeted more than 80 percent in New York trading this week after the home lender received a default notice on a $320 million loan.

Stock Slump

Carlyle Capital, run by John Stomber, fell $7 to $5 in Amsterdam trading. The fund originally sold shares at $19 each after Washington-based Carlyle delayed and then cut the size of the initial public offering by about 25 percent as the subprime contagion began. It then added the money raised in the IPO to a private $590 million pool opened in 2006.

Stomber didn't return calls or an e-mail seeking comment, and Emma Thorpe, a London-based spokeswoman for U.S. private- equity firm Carlyle Group, declined to comment.

Rubenstein, a lawyer and former policy adviser in the administration of U.S. President Jimmy Carter, started Carlyle Group in 1987 with former MCI Communications Corp. Chief Financial Officer William E. Conway and former Marriott Corp. executive Daniel D'Aniello. With $76 billion of assets, the firm ranks as the world's second-biggest private-equity firm after New York-based Blackstone Group LP.

Widening Spreads

The agency mortgage-bond market has about $4.5 trillion of securities, according to estimates from UniCredit. The spread between 30-year agency mortgage bonds and 10-year U.S. Treasuries widened to more than 200 basis points yesterday, the highest since 1986, data compiled by Bloomberg show.

Money-market rates for euros and pounds climbed to the highest since mid-January, signaling the global squeeze on short-term bank lending may be returning. The euro interbank offered rate, or Euribor, for the loans climbed 3 basis points to 4.43 percent today, the highest since Jan. 17, according to the European Banking Federation.

``Market conditions are the worst anyone in this industry can remember,'' said Alain Grisay, chief executive officer of London-based F&C Asset Management Plc, on a conference call with reporters today. ``I don't think anyone has a recollection of a total disappearance in liquidity. I just cannot remember a time when for six months there are billion of dollars worth of assets out there for which there is just no market.''

Market `Disconnect'

Investors are questioning the validity of even the highest- rated securities after Standard & Poor's and Moody's Investors Service assigned AAA grades to bonds backed by mortgages to people with poor credit who are now having trouble meeting their loan payments.

U.S. Securities and Exchange Commission Chairman Christopher Cox said last month the agency may overhaul rules that require investment firms to rely on credit ratings, after losses on top-ranked mortgage debt cast doubt on their reliability.

The Carlyle fund sold $900 million of assets in August and received a $100 million loan facility from parent Carlyle Group. Since then, Carlyle Capital has sold almost $1 billion of non- residential mortgage-backed securities to cut debt and also received a $150 million credit line from Carlyle Group. It didn't say how much of that credit line it had used.

Carlyle said in today's statement that margin prices requested for securities weren't ``representative of the underlying recoverable value'' of the notes. ``Unfortunately, this disconnect has created instability and variability in our repo financing arrangements,'' Stomber said.

Collateral Requirements

Carlyle's counterparties are Wall Street firms, which use repurchase agreements to lend money and require securities be put up as collateral. As the perceived credit worthiness of asset-backed bonds declined, the amount of money that can be borrowed using them as collateral fell.

``The banks are tightening credit standards and trying to curtail the lending they do,'' said Hans Peter Lorenzen, a credit strategist at Citigroup in London. ``One of the ways you do that it is increase haircuts you charge.''

``Management is actively working with the company's repo counterparties to develop more stable financing terms,'' Stomber said in the statement. He didn't identify the lenders involved.

Since filing its annual report a week ago, Carlyle Capital has met margin calls and additional collateral requirements of more than $60 million, the company said.

Carlyle said last month its agency mortgage securities ``have the implied guarantee of the U.S. government and are expected to pay at par at maturity.'' The U.S. Treasury denied speculation today that the government will guarantee mortgage- backed bonds issued by Freddie Mac and Fannie Mae, which are the two largest sources of American home financing.

The Carlyle fund eliminated its dividend and waived an incentive fee on Feb. 28 when it reported quarterly financial results, seeking to build liquidity as mortgage defaults in the U.S. rise.

To contact the reporter on this story: Edward Evans in London at eevans3@bloomberg.net.

Last Updated: March 6, 2008 17:00 EST