Friday, April 3, 2009

CRE Lender Trouble

If you’ve followed this blog for any length of time you know this is not the place to come for breaking news. However, I think what’s going on at Capmark is news, and I’m not seeing it covered elsewhere.

Capmark was GMAC Commercial Holdings Corp. until 2006, when a KKR/Goldman Sachs investment group acquired a 78% stake in 2006 and changed the name. The philosophy was to do one thing and do it well, and that was income property finance. It was a major CMBS originator until that market froze up, and has been the number one Freddie Mac and FHA multifamily originator for many years (more on their agency business here). They are also a direct lender, but to all appearances not a crazy one – as of third quarter 2008, weighted average LTV was 68.1%, nonperformers were only 2.4%, and construction loans were only 10.4% of funded loans, although there are substantial unfunded construction commitments (portfolio and financial data here). It appears they have a little CMBS and CDO security exposure, but not much. And, they are not solely dependent on new origination and loan performance – they have a huge servicing portfolio ($260B, the third largest commercial/multifamily servicer, according to this news release) which throws off a steady income stream.

Despite all these apparent strengths, Reuter’s reported on March 30 that Capmark credit default swaps had been triggered by failure to pay a bridge loan, and Bloomberg reported on March 23 that Capmark’s bonds were trading in the 18.5 – 19.5 cent range. What’s going on?

The immediate problem is a maturity issue. From an April 2 article:

Capmark is extending its annual report filing by two weeks and management anticipates submitting the document by April 15, but is not making promises that it will be able to do so. The company also recently received an extension on the maturity date of its $833-million bridge loan for two weeks, until April 9. So far, one lender of $48 million has not agreed to an extension and is asking for full payment.

If no agreement with lenders is met soon, says Fitch analyst Christopher Wolfe, Capmark will have to file for bankruptcy and ultimately go out of business.

Maturing loans are the biggest single problem the CRE sector faces (more on that at a Zero Hedge post here). It’s ironic that the biggest threat to its borrowers is also the immediate threat to one of the largest CRE lenders.

There are more fundamental issues as well. Capmark’s own loan portfolio is heavily weighted with loans originated during 2006-07, the peak years of the CRE boom.


I’ve previously posted on the key role vintage plays in losses. 2006-07 is probably the worst possible time to have originated a CRE loan since the early 1990’s, and almost 75% of Capmark’s portfolio was originated in this period.

Also, as mentioned above the portfolio appears conservatively underwritten based on a 68.1% weighted average LTV. But, the financial release contains this footnote:

capmark ltv

Since the bulk of the portfolio was underwritten during the peak years, there’s an excellent chance the projected values are no longer realistic. I’ve posted here showing how a relatively small deterioration in the fundamental variables can have a very large impact on values.

It seems clear there are substantial risks in the portfolio, which helps explain why the bridge lenders are reluctant to extend.