Carlyle Capital Corp (CARC.AS: Quote, Profile, Research), an affiliate of private equity firm Carlyle Group, is in default on about $16.6 billion of debt and said its lenders would likely take possession of its remaining assets.

The news provided a new sign of stress in global credit markets and affected asset prices and sentiment worldwide.

Bund futures in Europe, where Carlyle Capital shares are listed in Amsterdam, rose back to levels they traded at before the U.S. Federal Reserve and other central banks coordinated on Tuesday to inject liquidity into credit markets.

"The credit angst is back," said Tim Condon, head of Asia research with investment bank ING.

The default by the fund prompted spreads to widen on the iTRAXX Asia ex-Japan investment grade index, and European credit spreads also widened, returning close to record wide levels touched earlier in the week.

Carlyle Capital said it was unable to meet margin calls of more than $400 million and was now in default on about $16.6 billion of its debt.

"The remaining indebtedness is expected soon to go into default," Carlyle Capital said in a statement on Wednesday.

Carlyle Capital shares tumbled 70 percent to $0.83 compared with their $20 debut on the Amsterdam bourse last July.

Dutch market regulator AFM said it was monitoring developments closely but was not planning to suspend trade.

Carlyle Capital said its lenders had proceeded to foreclose on the mortgage-backed securities collateral as it was unable to pay the margin calls. The only assets held in its portfolio as of Wednesday were U.S. government agency AAA-rated residential mortgage-backed securities.

Analysts said the news would deepen the gloom over a global credit crisis that emanated from the U.S. housing downturn.

"Sentiment is broadly negative and news of missed margin calls at large highly leveraged funds only elevates fear of a vicious cycle of more forced selling at deep loss, collateral shortfalls, and more missed margin calls," said Brett Williams, credit analyst with BNP Paribas in Hong Kong.

Carlyle Capital's troubles began on March 6, when it said it had not been able to meet some margin calls. This snowballed over the next few days as more of its lenders feared it would default.

FEARS

June Bund futures FGBLM8 were 33 ticks higher at 117.95, and by 0839 GMT, the Markit investment-grade iTraxx Europe index <ITRAC5EA=GFI> was at 156.5 basis points, according to data from Markit, 10.5 basis points wider and erasing gains from Wednesday.

"The Fed will remain vigilant that it does not cause systemic problems, but I don't think we can rule out more instances of stress," Condon said.

"There's a realisation that the Fed action is not going to solve problems of liquidity and now there is the fear about hedge funds," said Andrea Cicione, a credit strategist at BNP Paribas.

Fears that more private equity groups, hedge funds and mortgage lenders are struggling with their financing are putting heavy pressure on global equity markets, which have tumbled in recent months on fears of a U.S. recession and the growing fallout from a global credit crunch.

But analysts said private equity groups and hedge funds would continue to be important segments of the financial system.

"These firms will be under pressure but any dislocation will be transitory. The crisis is creating a lot of opportunities for them," said ING's Condon.

Carlyle Capital said U.S.-based buyout giant Carlyle Group [CYL.UL] participated actively in negotiations with lenders and was prepared to provide substantial additional capital if a successful refinancing could be achieved.

Carlyle Group's managers have a 15 percent stake in the company.

It said negotiations deteriorated late on Wednesday when the pricing service used by certain lenders reported a drop in the value of the mortgage-backed securities collateral that was expected to result in additional margin calls on Thursday of approximately $97.5 million.

"Overall, it has become apparent to the company that the basis on which lenders are willing to provide financing against the company's collateral has changed so substantially that a successful refinancing is not possible," Carlyle Capital said.