Commercial real estate death watch – Capmark

October 13, 2009

What do you get when you put a U.S. automaker, a leveraged buyout and commercial real estate together – a soon-to-be bankrupt company. Caroline Humer of Reuters reports that that Capmark – formerly the commercial real estate business of GM financing arm GMAC – is teetering on the brink of bankruptcy, with the final blow coming possibly by the end of next week?

The company, which owns a bank that will continue to operate while it is in court, is in negotiations with lenders, bondholders and the Federal Deposit Insurance Company that will result in a filing by the end of October at the latest, the source said.

They are working on details of a debt-for-equity swap that will take place to bring the company back out of bankruptcy, he said. It is not certain how long the court process could take.

Those that swooped in and bought the unit in March of 2006 in an LBO may be out of luck if the company files for bankruptcy.

Kohlberg Kravis Roberts & Co KKR.UL, Goldman Sachs Group (GS.N) and Five Mile Capital, which bought Capmark in March 2006 for $1.5 billion in cash plus more than $7 billion in debt at the peak of the housing market, will not receive payment through the bankruptcy.

The source said the company will belong to its creditor group, which is made up of more than 50 banks and more than 50 hedge funds among others. The lead banks are Citigroup’s (C.N) Citibank and JPMorgan Chase (JPM.N).

There’s also a Warren Buffett angle to this tale. Reuters said Capmark has will sell the company’s loan servicing and mortgage business to Berkshire Hathaway and Leucadia National for $490 million in what would be a 363 bankruptcy when good assets are separated from the bad and then spun out into a stronger standalone.

It’s not surprising that a commercial real estate financing company is in trouble given the woes in the sector. Property prices are down between 35%-40%,  a good chunk of borrowers are underwater and new financing is almost non-existent. The government’s TALF program has done little so far to jump start the CMBS market, with just a measly $400 million deal from Developers Diversified the only beacon of hope so far.

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