Coastal Sunbelt and MCG Capital—A Sign of Tough Times?
Here is a follow-the-trail story. At the end of November, I noticed an SEC filing of a private placement of $20 million for something called “Coastal Acquisition Corp.” That is a sizeable capital raise. No press release. No indication of who this company was. So, we backed into what the answer appears to be. The Coastal filing address was Savage, Maryland, and a quick search for the Coastal name in Savage produced Coastal Sunbelt. Ah yes, that is a wonderful old name of a large produce distributor in the region. It was acquired in an LBO in 2007 by MCG Capital, a middle-market buyout and finance company based in Arlington. A little more research uncovered an MCG press release in July of 2009 announcing that MCG was selling Coastal Sunbelt back to management and another capital group, apparently only recovering MCG’s cost in the investment. That is not usually a cause for issuing a press release, but these are hard times, and the real reason was stated clearly in the press release as “another step forward in our strategic plan to preserve liquidity and deleverage the balance sheet as we monetize assets at or near their fair value.” You see, in the February before this July announcement, MCG had had a major restructuring exercise with its key lenders.
MCG went public in 2001 with the help of FBR. Like its local cousin American Capital, it has been under sever pressure in this market downturn. MCG and others have made loans and invested in equity over the years, accumulating assets based on certain valuations. In order to continue growing, MCG has had to borrow additional investment funds based on the current value of its portfolio, which was always going up when the economy was going up. When the market turned, most of those investments lost real or unrealized value. Not only did it become impossible to get new money to grow, the existing lenders to MCG measured that lost value in the MCG portfolio and began demanding repayment of existing credit. It is like a slack chain that suddenly pulls taut—everybody in the chain wants his money back at the same time and the higher up the chain (such as NYC money center banks), the more muscle you have to get it back. In this case, you see MCG signaling in July that it was doing what it could to avoid a disastrous capital squeeze and was “deleveraging” good assets like Coastal, assets which it would probably have held onto for an eventual profitable sale of the company. As it turns out, it took the Coastal team many additional months (from the end of February to the end of November) to raise their funds for the acquisition. Of course, this is a lot of conjecture, because there has been no announcement that the contemplated deal has yet closed.
