LONDON (MarketWatch) -- Carlyle Capital, the bond fund affiliated with private-equity firm Carlyle Group, is on the verge of collapse after failing to agree a new financing deal with lenders.

Late Wednesday, the fund (86522) CARYF said that it expects lenders will soon take possession of "substantially all" its remaining assets after it was unable to meet surging margin calls on its portfolio of residential-mortgage-backed securities.

Carlyle's woes contributed to a slump in European and Asian stock markets Thursday as investors feared credit problems will continue to spread. See Europe Markets.

The news also helped drive the dollar lower in foreign-exchange trading, sending it under 100 Japanese yen for the first time since 1995. See Currencies.

Shares of Carlyle Capital were all but wiped out, tumbling 95% in Amsterdam to 15 cents. The stock has plunged from the $12 range since the fund first announced it had missed some margin payments earlier in March.

So far, Carlyle Capital said it's defaulted on $16.6 billion of its debt, and its remaining borrowing is expected to go into default soon.

At the end of December, the fund had total equity of about $670 million and had used short-term loans, or repurchase agreements, to fund an investment portfolio of close to $22 billion.

Carlyle Capital's highly leveraged business model has made it particularly susceptible to declines in the value of its residential-mortgage-backed securities. Margin calls, or demands for cash to cover losses, have soared since the end of February as credit markets have worsened.

Justin Urquhart Stewart, co-founder of Seven Investment Management, said he expects to see more funds blow up as credit lines disappear and lenders become more cautious.

"Lending that might have been available three months ago just isn't there any more," Urquhart Stewart said.

Edmund Shing, a strategist at BNP Paribas, said a "raft of hedge funds" with similar investments are also shutting up shop. The forced sale of Carlyle Capital's assets is a concern because there aren't many buyers around, he added.

Talks collapse

Negotiations with lenders effectively ended late Wednesday when the pricing service used by certain lenders reported another drop in the value of mortgage-backed securities. That was expected to trigger another $97.5 million of margin calls Thursday, on top of the roughly $400 million of demands that Carlyle Capital received in the previous week.

"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," the fund said in a statement.

The fund said Carlyle Group assisted in its negotiations and had been willing to provide additional capital if a successful refinancing could have been achieved.

Carlyle Group, the investment adviser to the fund, has provided a $150 million line of credit. The private-equity firm said in a statement Wednesday that individuals at the group own around 15% of the fund's securities, but none of the group's other investment vehicles have invested in Carlyle Capital.

The fund's portfolio is comprised entirely of securities issued by Fannie Mae FNM, +0.85% and Freddie Mac FRE, -0.64% , which the fund has said effectively carry a government guarantee. The market value of these securities has fallen in recent weeks, however, as the credit crisis has slashed demand for all types of mortgage securities.

The fund's counterparties include Bank of America Corp. BAC, -1.32% , Bear Stearns Cos. BSC, -10.00% , BNP Paribas (013110), Citigroup Inc. C, -2.12% , Credit Suisse CS, -0.70% , Deutsche Bank DB, -1.89% , J.P. Morgan Chase & Co. JPM, -0.84% and UBS UBS, -0.54% , among others.

According to a Wall Street Journal report Wednesday, Deutsche Bank and J.P. Morgan were among the firms that rebuffed the fund's request for new financing terms, while some lenders, including Citigroup, had been willing to negotiate a new deal.