Banking: it's not over 'til it's over

"Capmark has one of the largest global commercial mortgage servicing portfolios with more than USD288,000 million in loans (as of 30 June, 2009) and is also a leading special servicer, workout specialist and asset manager."

So says the Capmark website, this morning, just hours after the company announced that it was seeking protection from its creditors.

"Capmark offers clients access to a broad spectrum of financing programs for the acquisition, construction, rehabilitation or refinance of commercial real estate. Capmark's operations have a Mortgage Banking network of experienced professionals in key markets across the United States to originate commercial mortgage loans."

It's hear that the problems set in, but what compounds them is the following: "Capmark Finance Inc. ("Capmark Finance") accesses capital sources for Capmark customers through correspondent relationships with insurance companies and other institutional lenders as well as being an approved seller/servicer for Fannie Mae, Freddie Mac and HUD/FHA."

It follows, then, that in the past two years, finding that capital from those sources has become increasingly difficult, and that the stimulus package has not worked in that direction.

And it's not the only business area that has come under pressure: "Capmark Investments LP is a respected leader in managing equity real estate and mortgage-related investments in the public and private markets with USD3,490 million in investments under management (as of 30 September, 2009). As a registered investment adviser, Capmark Investments provides real estate investment strategies including income-growth, and opportunistic return/risk objectives."

But in that paragraph is either good news or bad, depending on one's point of view: the assets were valued in late September this year. Some are saying that, by then, the market had bottomed out. So that's a good thing. But, if it has, then no one is telling Capmark's financiers. Or those financiers consider that the figures are not accurate. Those are bad things.

On 7 October this year, Capmark Finance announced that it has "originated" a USD2.238 million package to refinance a development called Oak Park Apartments in Illinois. And throughout the year, it has announced both refinancing and purchases of development property. But in the great scheme of things, they have been small deals - mostly for around USD1 million.

And while early this year, there was a flood of news about new deals, by August, this had dried to a rate of one per month.

Then in August, it announced that things were going from bad to worse.

"As previously announced, in May 2009 Capmark completed its new USD1,500 million term loan facility and amendments to its existing senior credit facility and bridge loan agreement. Capmark is in discussions with its lenders and senior noteholders with respect to a longer-term restructuring; the outcome of such discussions is uncertain.

"Capmark has voluntarily filed a Form 15 today with the Securities and Exchange Commission (“SEC”) to terminate its SEC reporting obligations. Capmark was required to file periodic reports with the SEC when its registration statement on Form S-4 was declared effective in March 2008. Capmark became eligible to terminate its SEC reporting obligations on January 1, 2009 because each class of its senior notes that were registered with the SEC had less than 300 holders of record on that date. Since that time, Capmark has continued to file periodic reports with the SEC on a voluntary basis."

Now, the outcome of those discussions is certain. Capmark issued a statement yesterday (Sunday) saying "On October 25, 2009, Capmark Financial Group Inc. (Capmark) announced that Capmark and certain of its subsidiaries had filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code."

For FDIC, the news is not good. But it's not all bad, either: the company says "This filing did not include Capmark Bank and does not impact [upon] the operations of the bank. Capmark Bank has not filed for bankruptcy, nor does it intend to.

"Capmark Bank continues to serve its customers as usual. Capmark Bank’s deposits remain insured by the FDIC to the maximum limits allowed by law."

But Capmark Bank is, now, effectively orphaned unless Capmark Group can come out of its Chapter 11 intact.

The bank is a small business but a massive operation. According to Capmark, "Formed in 2003, the Bank funds loans secured by commercial and multifamily real estate properties throughout the United States. As of 30 June, 2009, for the current year the Bank closed loans totalling USD1,182 million." Its website says that it is headquartered "near Salt Lake City, Utah" and "as of 30 June, 2009 the Bank's total assets equalled USD11,123 million. Its outstanding deposits totalled USD8,394 million. With total capital at 2Q 2009 end of USD1,379 million, the Bank is a "well capitalised" financial institution as defined by the FDIC.

But there are some signs that would raise eyebrows in the world of due diligence.

The bank's website is a single page. The headquarters office address is 6955 Union Park Centre, Suite 330, Midvale, Utah. There are no branches listed. There is, however, a link to "online banking."

6955 Union Park Centre is home to Direct Mortgage Wholesale which "is a mid-sized, national wholesale mortgage lender with incredible mortgage loan software which includes its proprietary automated underwriting system called DirectWare." It''s also home to "Loanology," "Escrow Bank USA," "Midvale Finance."

None of those use "Suite" numbers in their address, suggesting that Capmark Bank's address may be a drop box.

Capmark Bank's website says that it is regulated by both FDIC and the Utah Department of Financial Institutions. However, a check on the UDFI website this morning did not list Capmark Bank under Banks (state, national or out of state state chartered) banks, nor was it listed under registered mortgage lenders, savings and loans.

But is is listed as an "Industrial Bank" which is a highly specialised form of banking licence (see UDFI website). It's a clever vehicle that appears to fall part way between a depository institution and an investment (often mistakenly called "hedge") fund.

So, whilst Capmark Group's business has declined, Capmark Bank appears to have thrived. If it is the only valuable asset in the Capmark portfolio, then it may be that a sale is required to move the parent out of Chapter 11.

As it stands, the company is adamant that Capmark Bank can stand on its own. That, however, is likely to be subject to depositors not demanding their money back.

And that means FDIC has to make a policy decision. Does it adopt a wait and see approach, or does it make a pre-emptive strike and intervene in the bank to assure depositors that their funds are safe, and to sell the bank with the benefit of those funds.

It's a tough call, and one in which Capmark Bank has little say.

In trying to save the bank by leaving it outside the Chapter 11 filings, Capmark Group may just have left it out in the cold.