Capmark Near Bankruptcy Amid CRE Storm

When a group of private equity firms bought Capmark Financial, then a part of GMAC, in March 2006, the commercial real estate lender possessed $276 billion in loans and an investment grade credit rating. Now the company is teetering on bankruptcy. The WSJ said today that Capmark may file for Chapter 11 protection as early as this weekend.

Capmark's collapse comes as no surprise. The company, which provides financing, investment management and mortgage financing services to real estate, retail, industrial and other companies, warned in April that it might go bust.

Still, the lender's predicament shows how the floor is starting to buckle for companies that specialize in making loans to buy commercial property. It's also a sign of things to come -- other large commercial property lenders will be forced into bankruptcy, while healthier ones will be acquired. Meanwhile, banks heavily exposed to CRE are starting to crumble, as when regulators seized $7 billion-asset Corus in September.

It's a fast-moving blaze. Capmark has tried to sell assets and restructure its debt. But the plunging value of commercial property is choking off credit for potential buyers. The company managed last month to strike a deal to sell its mortgage banking origination and servicing business to Warren Buffett's Berkshire Hathaway and conglomerate Leucadia National for up to $490 million. But it's too little too late.

Unlike a conventional bank, which makes money by issuing mortgages and collecting on principal and interest, lenders like Capmark depend on a steady diet of commercial loans to generate fees. Other revenues come from reselling or syndicating loans. Those businesses are today in deep trouble.

Capmark's decline is a blow to the investors that bought a controlling stake in the company only three years ago. Private equity firms Kohlberg Kravis Roberts and Goldman Sachs Capital, and hedge fund Five Mile Capital, sunk $1.5 billion of their own equity in acquiring Capmark for $9 billion.