American and global financial markets will have to face up to the news that a big US commercial real estate lender could go bust this week.
The news of problems at Capmark Financial (which used to be part of struggling GMAC) comes on top of another bad day for small US regional banks on the weekend when seven where closed by regulators.
The Wall Street Journal reported that Capmark could go into bankruptcy very shortly.
It may not trigger any backlash because of the belief by many investors that the worst is over, but it will shake confidence in the tanking commercial real estate sector which is now threatening more and more US banks, from the smallest to the quite large
At the same time there is continuing speculation that the struggling CIT financial group, a lender to small and medium business, could also be forced into bankruptcy if a debt exchange fails this week.
Friday’s string of closures among the small regional and local banks took the number of failures so far in 2009 to 106, the highest since the recession and the savings and loan crisis of the early 1990s.
Capmark’s problems (and those at CIT in some respects) are confirmation that the commercial real estate market is now struggling as much as the residential side.
Capmark Financial Group Inc has been one of America’s largest commercial lenders; its problems, though anticipated in some sectors, could set off a chain reaction among smaller banks, developers and builders.
Capmark, formerly GMAC commercial real-estate arm, recently reported a second-quarter loss of $US1.6 billion and revealed it may be forced to seek bankruptcy protection to stabilise its finances.
According to the Wall Street Journal, the company is about to file for protection.
Capmark was bought from GMAC in 2006 by a group of private equity investors including KKR & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners. They own a reported 75%, with staff, management and a subsdiary of GMAC the rest.
Capmark is selling its mortgage servicing and banking operations to Berkshire Hathaway Inc. and Leucadia National Corp (which owns a swag of Fortescue Metals in Australia). The bank would not be part of the bankruptcy filing, according to the report. A bank based in Utah will not be part of the bankruptcy, according to the WSJ report.
Meanwhile CIT’s attempts to reduce its debt via a debt for equity swap could be known this week.
Earlier this month, CIT launched a debt restructuring plan with the hopes of cutting debt by around $US5.7 billion.
The company also is seeking approval from its bondholders for a prepackaged reorganization plan if it is forced to file for bankruptcy protection.
CIT received $US2.3 billion in US Government bailout funds late last year and in July secured an expensive $US3 billion emergency loan from some of its largest bondholders, thereby avoiding an immediate bankruptcy.
But the company still needs to reduce its massive debt burden to avoid collapse.
Reuters reported last week that CIT is now more likely to try a prepackaged bankruptcy. CIT’s exchange offer is due to end this Thursday.
The seven failures among the small banks on Friday, US time, equalled the most this year on any day (Source). 25 banks were closed in 2008.
Seven banks — three in Florida and one each in Georgia, Wisconsin, Minnesota and Illinois — were shut, according to the Federal Deposit Insurance Corp., pushing this year’s total to 106.
All had exposure to either dud housing or commercial loans, or were dependent on volatile short term deposits which were pulled.
Figures from CreditSights, a financial research group, show that commercial real estate loans made up almost half of all loans at most (80%) of the banks the research firm identified as troubled.
"Another wave of prolonged losses driven by weakness in commercial real estate could prove catastrophic to many of these weakened banks," CreditSights said.
That’s the most since the savings-and-loan crisis led regulators to shut 179 institutions in 1992. That was during the last recession.
Banks in Georgia have so far accounted for almost 20% of all US banks to close this year.
Georgia has seen 20 failures, followed by Illinois with 16, California with 10 and Florida with nine.
That number is expected to continue rising as the industry tries to get commercial real estate loans under control.
But that is proving tough as more and more apartment developers collapse and retail malls and associated developments go under.
The latest Federal Reserve Beige Book of anecdotal reports across the US economy highlighted commercial real estate as a continuing black hole for the financial sector.
In fact prices for commercial real estate fell another 3% in August, to be down between 35% and 40% in some parts of the US in the past year.
In August, the FDIC said 416 banks with combined assets of $US300 billion were on its list of “problem” lenders at June 30.
It isn’t known whether the banks closed at the weekend were among them because the FDIC doesn’t name banks on the list for obvious reasons.
All banks closed were small local banks. The total cost to the FDIC of the failures will be between $US200 million and $US300 million.
