Capmark highlights woes of commercial real estate

WILMINGTON, Del. Oct 13 (Reuters) - Capmark Financial Group Inc will likely become one of the largest commercial real estate lenders to fail, highlighting the challenges facing the deteriorating market for retail and office buildings.

A source told Reuters on Monday that Capmark would file for bankruptcy as soon as next week, with about $10 billion in assets. [ID:nSP460515]

Restructuring specialists said Capmark's troubles are a symptom of of the wider collapse in commercial real estate values and a signal of tougher times ahead for lenders and developers.

"I don't want to belittle Capmark," said Jeffrey Rogers, president of Integra Realty Resources Inc in New York, "but it's just a pimple on what's out there."

Capmark's impact will likely be limited because it has curtailed active lending, like many traditional sources of credit in commercial real estate, such as banks, insurance companies and the commercial mortgage-backed securities industry (CMBS).

Capmark was acquired by Kohlberg Kravis Roberts & Co [KKR.UL], Goldman Sachs Group (GS.N) and Five Mile Capital in March 2006 for $1.5 billion in cash plus more than $7 billion in debt.

"It was troubled from the time it was acquired," said Dan Alpert, the managing director of Westwood Capital, an investment bank in New York. "Think of what they paid for it. It was a disaster waiting to happen because of the leverage put on it."

Values of commercial real estate have plummeted over the past year. Moody's commercial real estate price index fell 5.1 in July alone and is down 39 percent from the peak.

As prices are falling, an enormous chunk of loans is coming due, and most traditional sources of lending have dried up. For even the best borrowers, getting a loan over $100 million is tough and those over $600 million, which used to finance malls and skyscrapers in the boom years of 2004 through the first part of 2007, are unheard of today.

Through the end of 2013, about $1.42 trillion of commercial mortgage-backed securities and bank loans are set to mature, according to accounting firm Ernst & Young.

Through the end of the second quarter 2009, about $141 billion in bank and thrift commercial real estate loans were delinquent, according research firm Foresight Analytics. It expects that figure to rise and to cause hundreds of bank failures.

For lenders such as Capmark, that means lots of their borrowers are saddled with loans that cannot be refinanced because of a lack of funding or because the loans are worth more than the property securing them.

"The poster boy of this problem would be Stuyvesant Town. That is a nightmare," John Lonski, the chief economist at Moody's, told the Reuters Restructuring Summit earlier this month, referring to a Tishman Speyer property in New York. "To think that the market value supposedly of Stuyvesant Town today is half of what they paid for this development just a couple of years ago ... That is incredible."

For borrowers, the collapse of Capmark presents less of a problem. The loans are fixed, and they are easily transferred if sold in the bankruptcy.

"It's not like CIT," said Paul Halpern of Versa Capital in Philadelphia. He said CIT Group Inc (CIT.N), which is struggling to avoid its own bankruptcy, lends on a revolving basis to small and medium-sized businesses, where credit is especially tight.

"CIT has a lot more follow-on impact."

Capmark's troubles could ripple through banks if it were forced to sell the loans on its books at fire-sale prices. Banks, which have been criticized for overvaluing their real estate loans, might be forced to write them down and as a result set aside more capital and reduce lending.

"I don't think it necessarily has systematic implications for the market," Matthew Anderson, partner and co-founder of Foresight Analytics, said of a Capmark bankruptcy. He said any impact from Capmark unloading its loans would likely be blunted by recent changes to accounting rules.

In April the U.S. Financial Accounting Standards Board agreed to give banks more flexibility in applying mark-to-market accounting to their toxic assets, heading off an avalanche of bank defaults.

Most specialists downplayed the potential impact from a bankruptcy filing by Capmark, even if it coincides with a CIT collapse, although they warned commercial real estate problems were quite real.

"People said about subprime that it was contained and the contagion wouldn't spread," said Stephen B. Selbst, a partner with Herrick Feinstein in New York. "I take the prediction that (commercial real estate) won't affect the broader economy with a grain of salt." (Additional reporting by Ilaina Jonas and Caroline Humer in New York)