Sunday, October 16, 2011

Morgan Keegan, Beware Your Only Hope

A consortium of private equity underwriters (PEUs) may be broker-dealer Morgan Keegan's only hope.  Investment News reported:

Private equity may be the last, best hope for Regions Financial Corp. in finding a buyer for Morgan Keegan & Co. Inc. A consortium of private-equity buyers, including The Blackstone Group LP, The Carlyle Group and Thomas H. Lee Partners, are finalists in the bidding for the broker-dealer, which Regions put on the block in June, according to Reuters.
Regions has at least two reasons for dumping Morgan Keegan.  One, it owes Uncle Sam $3.5 billion in TARP money.  The second relates to Morgan Keegan packaged mortgage security funds that exploded in 2007.  That prompted investor lawsuits, which claimed:

The four closed-end mutual funds are: (1) RMK Advantage Income Fund (“RMA”); (2) RMK Strategic Income Fund (“RSF”); (3) RMK High Income Fund (“RMH”); and (4) RMK Multi-Sector High Income Fund (“RHY”) (collectively, the “Funds”).

Investors in the Funds lost approximately $1 billion in 2007 because of the Funds’ investments in poor-quality asset-backed securities, leveraged many times over by complex capital structures.

The suit went on to claim "Morgan Keegan’s gross mischaracterization of risky asset backed securities as conservative corporate bonds and preferred stocks, and the undisclosed highly-leveraged credit risk in the low-priority asset-backed securities held by the Funds."

The company reached a settlement with authorities, according to

Morgan Keegan and an affiliate agreed to pay up to $210 million in penalties after authorities said investors were misled into putting money into the company's RMK Select Funds, which were tied to the performance of sub-prime mortgages.

Authorities said Morgan Keegan misled investors about the risks of the funds, misrepresenting material facts in promotional and regulatory documents. The company's settlement of the matter last week neither acknowledged nor denied the majority of the allegations.

That should sound a familiar ring to The Carlyle Group, whose mortgage backed security investment, Carlyle Capital Corporation, imploded in March 2008, when the firm failed to meet $400 million in capital calls.

Carlyle has an investor lawsuit, just like Morgan Keegan.  Rest assured, Carlyle won't settle with any admission of guilt.  They have their good name to save.

While Carlyle dumped CCC and distanced the firm from the venture, it will gladly use Morgan Keegan's distressed position to negotiate a cheaper price.  Consider the price Morgan Keegan could fetch for Regions:

7-26-11 - "Some investors say the unit might fetch as much as $1.5 billion."

9-18-11 -  "Regions hired The Goldman Sachs Group Inc. to find a buyer and hoped for a price of at least $1 billion."

10-18-11 -  "Regions may be lucky to get the $789 million it paid for the firm back in 2001."

I smell a PEU brown-pile special.  It's a perfect fit for Carlyle, where the new affiliate mirrors the parent.  Now, how to grow Morgan Keegan's government subsidized business?  Blackstone has its tentacles deep inside the U.S. Treasury and New York Fed

This ain't no Obi-Wan Kenobi "only hope."  It's much darker.

Update 10-23-11:  Bloomberg reported Regions plans to pull $250 million in dividends from Morgan Keegan before the sale.   Interestingly, the deal is back to $1.1 billion with Regions putting up $200 million in debt financing.