Berkshire Enters Deal With Capmark as Lender Weighs BankruptcyMode

By Andrew Frye and Pierre Paulden
Sept. 3 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway
Inc. and Leucadia National Corp. committed to spend as much as
$490 million on real estate-related assets from Capmark Financial
Group Inc. as the lender weighs a bankruptcy filing.
Capmark, owned by firms including KKR & Co. and Goldman
Sachs Group Inc., paid $40 million for the option to sell its
loan-servicing and mortgage business to the partnership of
Berkshire and Leucadia, the Horsham, Pennsylvania-based lender
said yesterday. Capmark reported a $1.6 billion second-quarter
loss and said the Federal Deposit Insurance Corp. intends to
order the company to bolster capital and liquidity.
Buffett is using the cash hoard he built in the real estate
boom for Omaha, Nebraska-based Berkshire to pick up assets from
companies hobbled by the property market’s decline. Last year, he
agreed to buy a portfolio of loans backing factory-built homes
from CIT Group Inc., the 101-year-old bank that may also file for
bankruptcy.
“He clearly is the banker of last resort, and it appears
that last resort now means collapse,” said Michael Yoshikami,
chief investment strategist at YCMNet Advisors, which manages
about $850 million including Berkshire shares. “There’s
certainly the possibility that somebody else is going to come in.
But with everyone’s capital levels stretched, there’s not a lot
of companies that can do that.”
Berkshire’s cash pile declined 21 percent to $24.5 billion
in the 12 months ended June 30 as Buffett boosted his holdings in
U.S. financial companies hurt by the economic crisis. He agreed
in September to spend $5 billion buying preferred shares in New
York-based Goldman Sachs, and this year he added to stakes in
Wells Fargo & Co. and U.S. Bancorp as the shares traded at their
lowest prices in more than a decade.

Capmark’s Lending

Capmark is one of the largest U.S. commercial real estate
finance companies, with more than $10 billion in originations,
according to Moody’s Investors Service. The company services more
than $360 billion of debt.
Capmark’s mortgage assets have been deteriorating since mid-
2007, Moody’s said in a May 5 report, as credit markets seized up
and the economy entered the longest recession since the 1930s.
Provisions against bad loans contributed to the second-quarter
deficit, which followed a net loss of $727.7 million in the first
three months of the year.
Laura Ulbrandt, a spokeswoman at New York-based Leucadia,
didn’t return a call. Buffett didn’t respond to a request for
comment left with his assistant Carrie Kizer. Joyce Patterson of
Capmark didn’t return calls.

Default Rate

The default rate on commercial mortgages held by U.S. banks
more than doubled in the second quarter from a year earlier amid
falling rents and occupancies for malls, office buildings and
warehouses. Loans that were 90 days or more past due climbed to
2.88 percent of outstanding balances in the second quarter, from
1.18 percent a year earlier, according to New York-based property
research firm Real Estate Econometrics LLC.
“The market’s down, it’s time to buy,” said Gerald Martin,
a finance professor at American University’s Kogod School of
Business in Washington who has studied Buffett’s investing
history.
The Berkshire and Leucadia joint venture, Berkadia III, will
pay $415 million in cash for the mortgage business if Capmark
enters bankruptcy. The venture would also pay $75 million in the
form of a note that can be reduced depending on losses in
Capmark’s portfolio financing multifamily apartments backed by
Fannie Mae.
Outside of bankruptcy, Berkadia III will pay $375 million in
cash and the $75 million note that can be adjusted for the losses.
The buyers will also provide a $40 million “holdback” they will
retain to cover indemnity claims.

Earlier Venture

Berkshire and Leucadia have teamed up at least once before,
in their 2001 deal to extend a $6 billion loan to Finova Group
Inc., a Scottsdale, Arizona-based lender. Berkshire and Leucadia
still owned half of the equity of Finova as of June 30, according
to a regulatory filing.
Buffett, celebrated as the Oracle of Omaha for his investing
savvy, transformed Berkshire from a failing textile maker into an
enterprise with businesses ranging from ice cream and underwear
to power plants and corporate jet leasing. Berkshire is the
biggest investor in companies including Wells Fargo of San
Francisco, American Express Co. and Coca-Cola Co.
Ian Cumming, Leucadia’s chairman since 1978, has used the
company as a platform for investing in businesses from insurance
to telecommunications. Leucadia also owns about 30 percent of
Jefferies Group Inc., the New York investment bank.

Capmark, GMAC

Berkshire slipped $400, or 0.4 percent, to $98,200 yesterday
in New York Stock Exchange composite trading. Leucadia fell 17
cents to $23.46.
Capmark had been a unit of GMAC LLC, the Detroit-based auto
and home lender, until 2006 when an investment group including
Goldman Sachs Capital Partners and KKR acquired a controlling
stake, according to a GMAC filing. As of March 31, investors
owned about 75.4 percent of Capmark, GMAC had 21.3 percent and
employees, former employees and directors held about 3.3 percent,
the filing said.
KKR, the New York-based private-equity firm run by Henry
Kravis and George Roberts, wrote its investment in Capmark down
to zero as of March 31, according to data provided by its
publicly traded investment vehicle. Moody’s rates the company’s
debt seven levels below investment grade.
Andrea Raphael, a spokeswoman for New York-based Goldman
Sachs, declined to comment on whether the company lost money on
Capmark. GMAC spokeswoman Gina Proia confirmed the contents of a
May filing that said the firm doesn’t have any financial
obligation or exposure to Capmark.
Capmark’s advisers include Mohsin Meghji, a principal at New
York-based restructuring firm Loughlin Meghji & Co. Meghji is
currently the chief restructuring officer.

For Related News and Information:
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U.S. home foreclosures: HOMFCLOS <INDEX> GP <GO>
News on property mergers and acquisitions: TNI MNA REL <GO>

--With assistance from Zachary Mider, Linda Shen and Jonathan
Keehner in New York and Dakin Campbell in San Francisco.
Editors: Dan Reichl, Philip Lagerkranser

To contact the reporter on this story:
Andrew Frye in New York at +1-212-617-1869 or
afrye@bloomberg.net.

To contact the editor responsible for this story:
Dan Kraut at +1-212-617-2432 or dkraut2@bloomberg.net.