Capmark Financial may be forced to file for Chapter 11 bankruptcy protection after reporting $1.6 billion of losses in the second quarter, thanks to its investments in loans and property.
The real estate finance firm today said it had already agreed to sell its North American mortgage business to Warren Buffett’s Berkshire Hathaway and the holding company Leucadia National Corporation for $490 million.
Our restructuring efforts may also include a reorganisation under Chapter 11 of the US bankruptcy code, the sale of certain additional businesses and/or a material contribution of cash and/or assets into Capmark Bank.
However Capmark, which manages value-added and opportunistic commingled funds and separate accounts through its investment arm, Capmark Investments, added that it may also file for bankruptcy protection as well as sell other parts of its operations, including the Utah industrial bank Capmark Bank.
“Our restructuring efforts may also include a reorganisation under Chapter 11 of the US bankruptcy code, the sale of certain additional businesses and/or a material contribution of cash and/or assets into Capmark Bank,” the firm said in a statement.
Capmark was bought by private equity and real estate investors Kohlberg Kravis Roberts, Five Mile Capital Partners and Goldman Sachs Capital Partners in a $16.8 billion deal in 2006. The consortium invested $2.1 billion of equity, according to a KKR factsheet, however KKR has since written its investment down to zero or near zero.
Reporting its second quarter results, Capmark said it lost $1.6 billion in the three months to the end of June, compared to net income of $11.5 million one year previously. Its losses on loans, investments and real estate alone were $656 million in the three months to June. The firm lost $494 million in its Asia operations, it added.
The sale of its North American servicing and mortgage banking businesses to Berkshire would likely take place irrespective of a Chapter 11 filing.
In agreeing a put option, Capmark said if it didn’t file for bankruptcy, Berkadia III, the vehicle sponsored by Berkshire and Leucadia, would pay $375 million in cash for the business, hold $40 million back to cover indemnity claims and allow Capmark to offset a $75 million note against its losses. If the sale happened inside bankruptcy proceedings, Berkadia would pay $415 million in cash and the $75 million note.
The US banking regulator, the Federal Deposit Insurance Corporation (FDIC), is now also in the process of issuing an administrative order against Capmark requiring it to submit capital and liquidity plans and placing restrictions on certain activities.
In December, Capmark applied for bank holding status in a bid to attract capital from the US government’s $700 billion bailout package.
Two months earlier, in October, Steven Lin, executive vice president of Capmark Financial and head of the firm’s Asia operations, resigned from the company. Based in Tokyo, Lin was responsible for all of Capmark’s activities in Asia and was a member of the executive and investment committees. Capmark Asia targeted Japan, Taiwan, China and the Philippines, investing in equity real estate, non-performing loans and distressed debt.