Capmark Financial Group is heading towards default, as the troubled lender weighs whether to file for bankruptcy after posting a $1.6 billion loss for the second quarter.

It’s a steep fall from grace for Capmark, who originated more Freddie Mac and FHA debt than any other lender last year and has consistently been one of the industry’s most prolific financiers since spinning off from GMAC Commercial Finance in 2006.

The firm has been bleeding staff and shutting offices this year, as it struggled to pay its corporate debt, which totaled about $1.5 billion. “When they went private through the spin-off from GMAC, they took on quite a bit of debt,” says Chris Wolfe, managing director of Fitch Ratings, which, along with Moody’s, downgraded Capmark earlier this month. “And they essentially violated a covenant at the end of last year. The writing was on the wall at that point.”

Earlier this year, the company’s creditors amended and extended their loan agreements, but as the commercial real estate sector continued to struggle, and as Capmark continued to rack up losses, that action was only delaying the inevitable. “They’re technically insolvent; as of the second quarter, they have negative net worth,” Wolfe says. “The only reason they haven’t filed is that their lenders allowed them to stay outside of the bankruptcy process. Theoretically, they shouldn’t have lasted this long.”

A white knight emerged earlier this month in the form of Berkadia III, a joint venture between Berkshire Hathaway and Leucadia National Corp. Capmark paid $40 million to Berkadia for a “put” option, meaning Berkadia agrees to buy the company's servicing and mortgage businesses should Capmark decide to sell. If the sale occurs outside of bankruptcy proceedings, Capmark would get about $490 million for the units, and if the sale happens during Chapter 11 proceedings, Capmark would receive $415 million.

The acquisition would be a boon for Berkadia, as they buy well below fair value. Most industry watchers expect the acquisition to be a “business play,” as opposed to an “asset play,” meaning Berkadia will likely keep the origination and servicing businesses up and running as opposed to winding it down and selling it off in a few years. Berkadia has yet to make its plans known. Meanwhile, Capmark declined to be interviewed for this story.

Both Berkshire Hathaway and Leucadia are typically long-term holders. Still, the first time the two companies partnered up, it was to buy The Finova Group for $5.6 billion in 2001. While that was an asset play, industry watchers don’t expect the same to happen here. “There are opportunities for them with the servicing business to take on new servicing of commercial real estate and special servicing,” Wolfe says. “So I don’t think they'd buy this to shut it down.”

The acquisition would be good news for borrowers, giving the market another agency lender that’s well-capitalized. But it’s bad news for lenders, who had been steadily siphoning off business from Capmark this year. “A lot of competitors were using Capmark’s finances against them, to sell against Capmark,” said one rival lender who asked to remain anonymous. “But now, we’ll have to compete against them again: I think this is more than just an asset play.” 

The industry will have to stay tuned to find out.