Relationship between risk and return capmark

In Re Capmark Financial Group Inc., B.R. –

relationship between risk and return capmark

RELATIONSHIP Maturity risk is the reflection of changes in interest rates over the term of the investment. risk or systtematic risk (also known as undiversifiable risk) is the uncertainty of future returns owing to the sensitivity of the return on. As depicted above, in connection with the Transaction, CFGI and .. LLC, viewed seizure of Capmark Bank by the FDIC as a significant risk. the loan maturity in return for collateral on all of the Capmark group's assets. Number of Parties: Absolute Return Capital Partners, L.P., TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA.

In Decemberwe applied to the Board of Governors of the Federal Reserve System "Federal Reserve" to become a bank holding company and financial holding company. We also applied to participate in the U. However, in Februaryafter further evaluating the financial and other requirements communicated by the Federal Reserve's staff and our other current priorities, we withdrew such applications.

Going Concern Considerations As a result of the adverse conditions described above, throughoutwe incurred operating losses due principally to fair value adjustments on our loans held for sale, real estate and investment portfolios and an increase in the provision for loan losses on our portfolio of loans held for investment. The combination of pre-tax operating losses and valuation allowances on our deferred tax assets recognized in the fourth quarter of have contributed to a significant decline in our stockholders' equity.

In light of adverse market conditions and our operating results as well as the negative effect on our liquidity from the near-term maturity of our bridge loan, we entered into discussions with the lenders under our senior credit facility and bridge loan agreement.

These discussions have included negotiating modifications to certain terms of both the senior credit facility and bridge loan agreement. Due to these conditions and events, substantial doubt exists about our ability to continue as a going concern.

Our management believes that access to capital markets is extremely limited in the current economic environment and it is unlikely that we will be able to access new funding sources if we are unable to complete the restructuring of our senior credit facility and bridge loan agreement. We plan to continue to negotiate with our lenders to complete a restructuring of our senior credit facility and bridge loan agreement.

In connection with any restructuring, our lenders are likely to require collateral to secure their loans and increases in the fees and interest rates under the borrowing arrangements. In addition, we are performing a review of all of our businesses, including exploring strategic alternatives for such businesses and implementing significant expense reduction initiatives. We have engaged financial advisors to assist with our efforts to manage expenses and evaluate our strategic alternatives, including debt restructuring alternatives.

There is no assurance that we will be able to restructure our borrowing arrangements on acceptable terms, if any, or obtain further waivers to or elimination of our leverage ratio covenant or further maturity extensions to adequately reduce the risk of default under our senior credit facility and bridge loan in the near future. We continue to actively manage our assets in an effort to reduce our overall debt while maintaining adequate liquidity to support our operations.

Further, our management is focused on maintaining appropriate regulatory capital at Capmark Bank US. The consolidated financial statements do not include any adjustments to reflect possible future effects on the recoverability and classification of assets, or the amounts of liabilities that may result from the outcome of our discussions with the lenders under the senior credit facility and bridge loan agreement, which would affect our ability to continue as a going concern.

Our North American Lending and Mortgage Banking segment operates a lending platform that provides financial products that may be used by real estate owners and developers to finance most types of commercial property, including properties in both traditional asset classes and specialized asset classes. Our financial products have historically included permanent loans, interim and bridge loans, mezzanine loans, construction loans, secured and unsecured lines of credit 4 Table of Contents and tax credit syndications.

Inwe ceased our proprietary Asian and European lending activities. We also previously provided financing through our North American Affordable Housing segment until Februarywhen we sold the majority of the assets of that business.

We source new lending opportunities through our commercial mortgage banking network in the United States and through our existing relationships with property owners and developers and other third parties located across the United States. Historically, we have used asset sales, including syndications, participations and securitizations, to transfer some or all of the interests in our loans and other financial products that we originated or acquired in connection with our commercial real estate lending and mortgage banking activities to third parties, including banks, GSEs, insurance companies, investment funds, opportunity funds, third-party conduits and other investors.

In recent periods, we have significantly reduced our proprietary lending and focused our efforts on originating loans for third parties and GSEs because market conditions have adversely affected our ability to securitize and syndicate loans and other financial products.

In addition, a substantial amount of our loans have been originated through Capmark Bank US due to its access to available funding sources. Our North American Investments and Funds Management segment focuses upon the sponsorship and management of real estate debt and equity funds, as well as the management of our own real estate debt and equity investments. Our investments consist of a broad range of debt and real estate equity investments, including mortgage loans and securities, mezzanine loans, commercial mortgage-backed securities "CMBS"residential mortgage-backed securities "RMBS"real estate investment trust "REIT" securities and synthetic securities.

relationship between risk and return capmark

The investment structures we have historically used for these investments include commingled investment funds and collateralized debt obligations "CDOs" ; direct investments that we make with our own capital; and joint ventures and similar arrangements with other investors in Europe and Asia. Inwe ceased making proprietary investments in Europe and Asia and are focused on managing our existing loan, investment and fee-for-services businesses in those segments.

Due to market conditions, we reduced our level of new proprietary investments in North America in Our investments and funds management business provides us with a recurring source of management fees that are based, in part, on the amount of assets under management or in the case of certain funds that we manage, on the amount of capital commitments from fund investors during the commitment period.

In addition, we may earn incentive fees that are calculated based on investment returns and earned when certain thresholds are achieved. When market conditions permit, these activities also provide us with an additional channel for distributing the loans and other financial products that we originate in connection with our commercial real estate lending and mortgage banking business.

In addition, these investment activities provide us with a means of directly investing in real estate debt and equity investments; although we are not currently making additional investments other than funding existing commitments. Servicing Our servicing activities involve acting as a master, primary and special servicer of pools of loans that we have securitized or that are securitized by third parties. We also act as a primary servicer of commercial real estate loans that we have originated for our balance sheet or as a correspondent lender.

Additionally, we service commercial real estate and other loans that are originated by third parties who outsource the servicing of loans that they originate. To the extent we have retained or acquired a subordinated residual interest in a securitization transaction, we also act as the special servicer for the securitized pool of loans. We conduct our primary and master servicing business through three central processing centers that are located in Horsham, Pennsylvania, Hyderabad, India and Mullingar, Ireland and regional client relations offices that are located in North America, the United Kingdom, Ireland, Japan and the Philippines.

Our special servicing activities are carried out in offices that are located in North America, Europe and Asia. Our servicing activities provide us with recurring servicing fees that are generally paid throughout the term of a securitization or loan as well as special servicing and asset administration fees that are generally paid after the loan has been designated as a defaulting loan.

As master servicer, we are also required to advance primarily principal and interest payments on underlying loans in the securitization pool under specified circumstances.

What is Risk and Return?

We also earn interest income on any payments advanced. Our North American servicing activities may also generate interest income and trust fees and other forms of economic value that we earn or realize on the escrow balances that borrowers maintain for loans that we service. Our Business Segments For management reporting purposes, we conduct our three core lines of business through six business segments. These business segments, which are organized based on geography and the type of business conducted, consist of: Competition We compete across a variety of business lines within the real estate finance sector, including lending and mortgage banking, investments and funds management and servicing.

In carrying out our investments and funds management business, we compete primarily with REITs and other investment advisers and sponsors of investment funds, including NorthStar Realty Finance, Newcastle Investment Corp. We compete in each of our business lines based on pricing, terms, structure and service.

Our competitors seek to compete aggressively on the basis of these factors and we could lose market share to the extent we are unwilling to match our competitors' pricing, terms and structure due to our desire to maintain interest margins, credit standards, the economic capital analysis we apply to our business or any combination of the foregoing.

To the extent that we match competitors' pricing, terms or structure, we might experience decreased profit margins and increased risks of loss. Some of our competitors are large companies or large financial institutions that have substantial capital and technological and marketing resources, some of which are larger than us and may have greater access to capital at a lower cost than we do, including access to funding provided by the U. The level of regulation and supervision to which we are subject varies from jurisdiction to jurisdiction and is based on the type of business activities involved.

The regulatory and legal requirements that apply to our activities are subject to change from time to time and may become more restrictive, making our compliance with applicable requirements more difficult or expensive or otherwise restricting our ability to conduct our businesses in the manner that they are now conducted. Changes in applicable regulatory and legal requirements, including changes in their enforcement, could materially and adversely affect our business and our financial condition and results of operations.

United States Federal and State Regulation of Commercial Lending Activities Our commercial real estate lending and mortgage banking and servicing businesses are subject, in certain instances, to supervision and regulation by federal and state governmental authorities in the United States and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things, regulate lending activities; regulate conduct with borrowers; establish maximum interest rates, finance charges and other charges; and require disclosures to borrowers.

Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies and require licensing of lenders and adequate disclosure of certain contract terms. Additionally, both the Credit Agreement Guaranty and Bridge Loan Guaranty contain "savings clauses" limiting the obligations of each Guarantor to the maximum amount allowable under governing fraudulent transfer laws.

The language of the Credit Agreement Guaranty's savings clause is as follows: To effectuate the foregoing intention, the Agent, the Lenders and the Guarantors hereby irrevocably agree that the obligations of each Guarantor under this Guaranty at any time shall be limited to the maximum amount as will result in the obligations of such Guarantor under this Guaranty not constituting a fraudulent transfer or conveyance.

For purposes hereof, "Bankruptcy Law" means any proceeding of the type referred to in subsection 7. Code, or any similar foreign, federal or state law for the relief of debtors. A substantially identical provision can be found at Section 1 b of the Bridge Loan Guaranty. Each of these ratings categorized the debt as "investment grade," albeit at the low range of the spectrum. The parties have stipulated that, at the time of the Transaction, CFGI could have sold or caused the sale of its assets and businesses and used the proceeds to satisfy all of its debts and the debts of its subsidiaries.

Voidability of Subsequently Incurred Obligations. The parties agree that all claims replacing debt or guaranties issued in must be tested by whether the debt or guaranties were voidable in Capmark's financial condition at the time of the Transaction was strong.

In connection with the closing of the Transaction, CFGI was required to apply purchase accounting to 79 percent of its closing date balance sheet, which included adjusting all of the assets and liabilities to their fair values as of March 23, to the extent of 79 percent.

Thus, on a book value basis, the consolidated positive net worth of the CFGI enterprise was enhanced by the Transaction. At the time of the Transaction, CFGI was solvent, adequately capitalized, and able to pay its debts as they matured. Moreover, at the time of the Transaction, CFGI had the ability to pay in full all the liabilities of CFGI and its subsidiaries including the Credit Facility and Bridge Loan by selling its assets or businesses including subsidiaries for their fair values.

Luehrman's] conclusions with regard to CFGI's solvency. At the time of the Transaction, CFI was solvent, adequately capitalized, and able to pay its debts as they matured. The Guaranties had a low likelihood of being called and, therefore, should not be included as a liability at fair value in an amount that would render CFI insolvent on a balance sheet basis.

The notes consisted of: The purpose of the Notes offering was to convert bridge short-term debt into medium to longer term debt. The Indentures Debtors' Exs. As with the then-existing Credit Agreement Guaranties and Bridge Loan Guaranties, the guaranties on the Notes are subject to a "savings clause," limiting each Guarantor's liability to the maximum amount allowable under applicable fraudulent transfer laws.

Any term or provision of this Indenture to the contrary notwithstanding, the maximum aggregate amount of the Guaranteed Obligations guaranteed hereunder by any Guarantor shall not exceed the maximum amount that can be hereby guaranteed without rendering this Indenture, as it relates to such Guarantor, voidable under applicable Bankruptcy Laws or laws relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally.

Understanding the relationship of Risk & Return

Thus, virtually all of the proceeds of the Transaction were used to pay antecedent debt. Both before and after the Transaction, CFGI's long-term unsecured debt maintained its "investment grade" rating from the three major ratings agencies. At the time of the Transaction, Capmark's financial condition was strong. Capmark's earnings in had been positive, and the first quarter of was extremely profitable. Moreover, CFGI had the ability to pay in full all the liabilities of CFGI and its subsidiaries including the Notes by selling its assets or businesses including subsidiaries for their fair values as of the date of the Transaction.

Events Leading Up to Entry into the Transaction As a result of the turmoil in the credit markets and a decline in the value of its mortgage-related assets, Capmark found itself in an increasingly challenging financial situation at the end of Markets in which Capmark operated its businesses had experienced significant stress and disruptions beginning in Julyas the credit markets began to deteriorate.

That stress and disruption accelerated significantly in the fall of with the Lehman bankruptcy, which created a great deal of uncertainty and fear in the market, causing asset values to decline and liquidity to dry up. In response, the Company took steps to limit new commitments, cut expenses, and preserve liquidity. The Company began exploring a variety of alternatives aimed at extending maturities, preserving liquidity, and potentially converting a meaningful amount of debt to equity to resize and stabilize the balance sheet for the longer term.

These included, inter alia, different types of recapitalizations, debt for equity swaps, the exchange of smaller amounts of secured debt for larger amounts of unsecured debt, dividing the company into a "good bank" holding good assets and a "bad bank" holding distressed assetsand converting to a bank holding company to obtain access to TARP and other federal funding programs.

The Company hoped that by taking a proactive role, it could head off the various pressures facing the Company and ensure its own long-term viability. This was not an easy task. Tom Fairfield, Capmark's General Counsel and an Executive Vice President, testified that the Company was "under pressure from virtually every corner of its businesses.

Additionally, the Company's losses posed a significant risk that it would breach the leverage ratio covenant in the Credit Agreement, see Debtors' Ex. Capmark's corporate debt ratings, which had been downgraded earlier, were again downgraded by all three of the major ratings agencies.

In re CAPMARK FINANCIAL GROUP INC., et al., Debtors.

If those advances were not paid, Capmark risked termination of its servicing contracts with the GSEs and commercial mortgaged-backed securities "CMBS" counterparties. Any further downgrades to Capmark's servicer ratings which had already been downgraded, see Debtors' Ex. The GSEs were concerned about Capmark's financial stability as potentially impacting their servicing portfolios and insisted that if Capmark did not quickly deal with potential defaults under the bank debt and enhance its long-term financial position, the GSEs would be compelled to terminate their contracts with the Debtors.

Any termination would have been a major blow to Capmark, not merely because its contracts with GSEs were a major source of revenue, but also because they would have likely triggered further terminations by CMBS counterparties.

Because the FDIC considered CFGI the primary financial support for Capmark Bank as well as the obligor on the Bank's capital maintenance agreement, Capmark's management thought it crucial to address proactively the Company's financial stability issues and to avoid bankruptcy. Faced with this set of circumstances, Capmark made a critical decision in the beginning of Levine testified, the Debtors' primary goal at this point was to effect a holistic restructuring of the balance sheet, maintaining their core businesses and continuing as a going concern.

The Company believed that using up so much of its liquidity to pay a short-term debt would negatively impact the company's ability to restructure itself successfully, and would eventually force the company to file for bankruptcy. Among the restructuring alternatives being considered in early was a chapter 11 filing.

Capmark was extremely averse to the idea of filing for bankruptcy. We were trying to achieve a restructuring of the company These kinds of businesses don't typically do well in a bankruptcy. And that was our view and the view of our advisors, so we used a lot of efforts to try to avoid that.

In particular, the Company believed that the GSEs, CMBS trustees, and large insurance counterparties would not have been willing to continue doing business with the Company in bankruptcy. Fairfield testified that in the March, April, and May timeframe, a Capmark bankruptcy was neither inevitable nor highly likely and that the best alternative for all of the stakeholders was to maintain the core businesses, restructure the debt, and continue to operate as a going concern.

Capmark began negotiating with the Bridge Loan Lenders who also held a large percentage of the outstanding debt under the Credit Agreement in February At first, the banks were completely unwilling to compromise.

The bank steering committee added that it was not prepared to provide the company with any extension of the bridge loan maturity. On March 15th, the bank steering committee again told Lazard that it would not budge. The banks' demand for full payment of the Bridge Loan was unacceptable to the Company.

Capmark refused to pay down the debt or grant liens on all its assets; the Company believed that doing so would not be "prudent, and in the interests of the company and the stakeholders given the liquidity needs and other issues" described above.

Having spent enormous time reviewing and evaluating different potential restructuring alternatives, Capmark believed it was necessary to accomplish a holistic solution to retain as much of the Company's assets and liquidity as possible to both fund the ongoing businesses and keep counterparties comfortable, and to retain consideration for future debt exchanges or other recapitalization transactions.

As a result, Capmark refused to back down in the face of the banks' demands and even made contingent plans to file for bankruptcy in the event no resolution was reached with the banks, and the Company found itself in default a position Capmark adopted as a negotiation tactic as well.

The Risk / Rate-Of-Return Relationship - eXtension

Finally, on March 19th, the banks "blinked. The banks "finally accepted the fact that [the Company was] not going to repay [the Bridge Loan], and then indicated that they would accept something less than full repayment of the bridge loan, and indicated a willingness to grant an extension of a couple of weeks to engage in further discussions Capmark's Board approved the extension.

The next two months were characterized by extensive arm's length, hard-fought, and often contentious negotiations.

relationship between risk and return capmark

There were numerous disagreements between Capmark and the Bridge Lenders, as well as disagreements within the Bridge Lender group. Talks threatened to break down on several occasions, and the Board met seventeen times between March 6 and May 7,the date on which the parties reached an agreement in principle.

Terms of the Transaction As part of the Transaction, the parties entered into amendments to both the Credit Agreement and Bridge Loan Agreement to, among other things, i terminate any borrowing capacity under the revolving credit portion of the Credit Facility and convert any outstanding borrowings thereunder to term loans, see Debtors' Ex. As such, the key terms of the Secured Credit Facility were "market terms" that would be expected in an arm's length transaction between a company comparable to Capmark and third-party financing sources in These facts were stipulated among the parties.

The key features of the Transaction are illustrated in Debtors' Demonstrative Ex. The secured lenders' security interests in the pledged collateral were validly perfected as a condition to closing the Secured Credit Facility.

relationship between risk and return capmark

The maturity date of the Secured Credit Facility is March 23, The Guaranties and Additional Guarantors. Each Guarantor, jointly and severally, unconditionally and irrevocably guarantees To effectuate the foregoing intention, Each Guarantor hereby unconditionally and irrevocably agrees that in the event any payment shall be required to be made In connection with the closing of the Secured Credit Facility, CFGI, the Guarantors, and the Indenture Trustee also executed an amendment to the Indentures to correct an "ambiguity, omission, defect, or inconsistency" in the "limitation on liens" covenant in each Indenture.

Due to a scrivener's error, the words "secured by Liens," highlighted below, were omitted from Section 4. As explained by Mr. Fairfield stated that in the course of negotiating the bank loan transaction, the parties have become aware of a drafting error in Section 4.

Giove agreeing that "the Basket Provision as set forth in the Offering Circular accurately reflects the mutual intention and agreement of the parties with respect to that provision. In effect, there would have been no lien basket at all, in contrast with the terms of the existing credit facilities which permitted the incurrence of secured debt in terms similar to that described in the offering circular.

Moreover, when CFGI registered new Notes to exchange for the original Notes in pursuant to a Form S-4 registration statement as required by the original Note Indenturesthe prospectus contained the correct description of the lien basket provision. The Offering Circular for the Notes correctly stated the language of the covenant by including the words "secured by Liens" and the Indenture amendments conformed to what the Offering Circular disclosed. Capmark was advised that the indentures contained provisions which allowed for the correction of omissions or defects without the need for prior notice and consent of the noteholders.

Capmark thereafter followed the procedures set forth in the indentures for amending the indentures via the issuance of supplemental indentures. DBTCA executed the Supplemental Indentures on or about May 20, and thereafter provided notice of the amendments to the bondholders. Following the Transaction, neither CFGI nor its subsidiary Guarantors were solvent, adequately capitalized, or able to pay their debts as they matured. Benefits of the Transaction Stated differently, entry into the Secured Credit Facility "averted what would have likely been a bankruptcy filing," id.

Entry into the Secured Credit Facility headed off further downgrades to the Debtors' servicer ratings and significantly alleviated the risk of servicing contract terminations by the GSEs and the CMBS trustees. The sale of the servicing business for a favorable price was another major benefit of the Secured Credit Facility.

Had the Debtors not obtained the Bridge Loan extension and averted other loan defaults, they would have risked termination of the servicing and pooling agreements, and likely would have been forced into a quick sale of that business, for which the Debtors would not have been able to obtain as much value as they later did.

With the Secured Credit Facility in place, the Debtors had the time to explore a sale of the servicing business in an orderly and organized manner. The Debtors hired advisors, solicited bids from some twenty companies, and eventually entered into a put agreement with Berkadia on September 2,which not only gave the Debtors the option to sell at a favorable price, but also allowed them to retain the business in the event they were able to effectuate the holistic restructuring they were still working towards at that time.

The Debtors were able to continue negotiations with the FDIC throughout the Summer and Fall and ultimately succeeded in heading off what might have been a devastating bank seizure or, in the event of an immediate bankruptcy, a significant priority claim against assets of CFI.

In short, by entering into the Secured Credit Facility, Capmark avoided what likely would have been a bankruptcy filing. Capmark's objective at this time was to stay out of bankruptcy and proceed if at all possible with a holistic restructuring plan which would enable it to operate its businesses as a going concern. Claims Against The Secured Lenders The Official Committee and the Ad Hoc Unsecured Committee assert that substantial claims exist against the secured lenders.

These actions include claims for: The Official Committee also asserts that the amount of the secured lenders' secured claim is limited by reason of operation of the "savings clause" contained in the Guaranty.

Having secured an extension of their short-term debt obligations while holding on to a large percentage of unencumbered assets, the Debtors spent the Summer and early Fall of attempting to negotiate a comprehensive restructuring with all of their creditors. Members of the Debtors' management, as well as their outside advisors, met repeatedly with representatives of the various secured and unsecured groups and discussed a variety of potential resolutions.

The Debtors were aware they would have to file for bankruptcy on or before August 27, to preserve a bankruptcy preference action against the secured lenders. In the days and weeks prior to that date, both management and the Board of CFGI discussed the benefits and drawbacks of such an approach.