Commercial Real Estate Finance

Last week, A Warren Buffet-led group struck a deal to acquire Capmark Financial Group Inc.’s mortgage banking business . A newly formed entity owned by Buffet’s Berkshire Hathaway Inc. and Leucadia National Corp. was given a put option to purchase Capmark’s North American servicing and mortgage banking businesses. Capmark operates three core business lines: lending and mortgage banking, investments and funds management, and servicing. The latter of which is, and has been drastically adversely affected by the poor performance of the first two. Jeff Zaun from S & P remarked recently, “We expect Capmark either to enter Chapter 11 bankruptcy proceedings or to negotiate a distressed exchange outside of bankruptcy, which most likely would affect most of its debt. We will consider either of these events to be a default.” And Buffet’s bid reflects either possibility, offering $490M, or $415M if Capmark files for bankruptcy. So why do I expect Capmark to choose bankruptcy?

In order for Buffet to take over, a servicer needs the OK of all existing bondholders and lenders to the company (not CMBS lenders). Essentially, Capmark’s debtors need to agree to release the servicing division, and getting everyone to play nice may prove to be quite an uphill battle. If the debtors do not agree, management would likely take the company into bankruptcy in an attempt to get a bankruptcy judge to approve the sale to bring the company liquidity. The decision comes down to whether or not Capmark believes the $415M bankruptcy adjusted price that Buffet is offering is higher than the price a distressed exchange outside of bankruptcy would bring. And if Capmark’s bondholders and lenders disagree with them, bankruptcy may be the only option to bring the company the liquidity it is seeking.

Either way, it will be very interesting to see how this dilemma unfolds.  Will Capmark, one of the poster children for servicing CMBS, prevail?  Will Buffet be able to turn them around?  Will he at least turn a profit for investors? A more important question however, might be: Will other servicers and CMBS lenders learn anything from whatever direction Capmark decides to go in?  While they may have been one of the biggest players on the commercial real estate side of the credit crisis debacle, they certainly weren’t the only one.  There will be other servicers that suffer, and many more lenders who will fail. Everybody has been waiting for somebody to make the first move, and nobody wants to be “that guy.”  Capmark may be forced to be “that guy”, and regardless of whether the outcome is good given the circumstances, or horrible, at least it will provide something the commercial real estate market hasn’t had much of in the last year and a half….a comp.

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