Capmark Financial seeks Chapter 11 protection

Owned by Goldman Sachs Group Inc. (NYSE: GS) and KKR & Co. (Euronext: KKR), the lender sought Chapter 11 protection after it posted a second-quarter loss of close to $1.6 billion.

In deep debt
The company has been in financial straits for months now and had warned of an impending bankruptcy in September. Forty-three affiliates have also sought bankruptcy protection.

Formerly known as GMAC Commercial Holding Corp., Capmark Financial services more than $360 billion of debt, according to data revealed by Moody’s Investors Service.

Capmark, in its bankruptcy filing, listed assets of $20.1 billion and liabilities of $21 billion as of June 30.

Holders of Capmark's secured debt include Citigroup Inc, hedge funds Paulson & Co., Anchorage Advisors and Silverpoint Capital.

Portion of Capmark's debt, which the company will be unable to repay, might be converted to stock, said a person familiar with the matter.

Attorney Martin Bienenstock, a partner at Dewey & LeBoeuf LLC in New York, the firm that is handling the bankruptcy case, said, “All the businesses will be saved and continue with Capmark or will be sold as going concerns for full value.”

The lender claimed that it "continues to look for appropriate strategic outcomes for certain of its businesses".

In all, the Horsham, Pennsylvania-based lender and its affiliates have an obligation of $7.1 billion from the 30 biggest creditors, without any guarantee backing their claims.

“Unsecured lenders and bondholders, either in a default or restructuring scenario, would experience substantial losses,” Moody, which has accorded C rating to the firm, said. The rating is indicative of the potential loss during the restructuring process.

The company had, in a Sept. 2 statement, claimed that Warren Buffett's Berkshire Hathaway Inc. and Leucadia National Corp. will buy its loan servicing and mortgage business for as much as $490 million.

Repercussion of recession
Value of commercial property in the nation has plummeted ever since the current wave of recession came to the surface late last year. Economies have been caught in the vicious circle of low demand and low production.

Employers have been handing out pink slips to employees like never before. As a result the demand for offices, retail space and rental apartments have reduced drastically, which has hit companies like Capmark really hard.

Capmark has found itself in a quagmire as the default rate on commercial mortgages catapulted to their highest levels. These default rates have more than doubled to the highest since 1994.

"We view this reorganization process as an unfortunate but necessary response to recent unprecedented conditions in financial and commercial real estate markets, which presented a significant challenge for Capmark and similarly situated finance companies," said Capmark President and CEO Jay Levine.

"By constraining the availability of capital, these difficult market conditions had a negative effect on all our core businesses," added Levine.