Richard “Rick” White got his start in corporate mergers and acquisitions law but today represents lenders, primary servicers, master servicers and special servicers in all matters related to commercial mortgage-backed securities loan servicing. He’s had his hands full this year at the Atlanta office of Bryan Cave, thanks to his clients’ ingenuity and the deal-making he helps facilitate between transaction parties. In a market where it’s harder to get deals done, White’s hedge fund clients have found the proverbial silver lining by exercising cleanup-call rights on CMBS trusts and are taking advantage of fair-market-value purchase options on defaulted loans.
White talked Commercial Observer through the deals he is working on, the trends he’s seeing and why it pays to have a diversified practice in a sometimes-volatile industry.
Commercial Observer: How’d you get your start in the industry?
White: I started off in the corporate mergers and acquisition practice [at the predecessor firm to Bryan Cave] for a short time, and the first client I brought in on my own, as a mid-level associate, was a loan servicer called Trimont Real Estate Advisors. I represented the three managing directors in acquiring the company from the former owners in 2002, and they owned the company until last year when Trimont was sold to Varde Partners. I still work with them, mainly on defeasance deals and some collateralized debt obligation deals as well as general CMBS transactions—commercial servicing-related. I left the firm because we didn’t really have a CMBS or servicing practice, and I went to Kilpatrick Townsend & Stockton. At that time they had the premier group in the city. [White returned to Bryan Cave in 2015.] I continue to represent Trimont to this day, through the ownership change, and I’m very grateful for that.
Your clients include master servicers, prime servicers and special servicers. Do they make up the bulk of your client base?
My entrée into the CMBS world was representing commercial servicers, who I still represent today, but I also do a lot of work for hedge funds and nonbank lenders. What I’m most busy with right now is representing a couple of hedge funds in seven or eight transactions that involve the purchase of loans out of CMBS trusts in what we call “cleanup-call transactions.” They occur when the balance of the CMBS trust is reduced to a certain dollar amount, typically 10 percent of the original balance, and parties to the pooling and servicing agreement or the trust agreement have the right to purchase remaining loans and REO [or real estate-owned] property out of the trust. That seems to be fairly hot right now, as some of the older trusts of these deals—2001, 2003, some even go back to the late 1990s—have been in existence for quite a while, and there aren’t many loans left in the trust so there is an ability for our clients, through various vehicles, to purchase those loans out of the trust.
Is this activity a recent phenomenon?
It’s interesting because back in the mid-2000s we were doing this work, but we were representing clients in liquidating these pools and then reselling the loans into new securitizations. Those were being sold to other large banks who had securitization platforms. Now what we are seeing is that the hedge funds we are representing are purchasing these loans then pooling them with other loans—either from other liquidations or loans that they have on their balance sheet—and securitizing them themselves.
Are you seeing many loan workouts this year?
We are seeing loans that are in default, whether they are maturity defaults or payment defaults. They seem to run the gamut a little bit. I’m not currently working on a ton of liquidations, but what I am working on is fair value purchase options. This means that whoever is the controlling class holder in a trust oftentimes has the right to buy a defaulted loan out of the trust from the special servicer at what is called, “the fair value purchase price,” which is the appraised value of the loan. Our clients are acquiring the loan, modifying the loan or doing some other workout of the loan, or they are foreclosing on the property to get to the real estate.
So you’re working on some modifications also?
Only when clients acquire loans out of the trust and have the ability to modify them. Often our client will acquire a loan and foreclose on it if it can’t be worked out with the existing borrower—because the borrower wants to walk away from the property, for example—then we will enter into a new loan with a new borrower who wants to own the property at a reduced loan balance, because we acquired the loan for less than the original unpaid principal balance.
Has the industry changed this year for your clients?
It’s picked up a lot lately, but the market has definitely changed. We have a fairly large commercial loan origination practice: the large banks are going to originate throughout the rest of the year, while the nonbank lenders are trying to originate as much as they can prior to October. Given the current political environment, there’s a lot of uncertainty. Brexit also makes things interesting.
What trends are you seeing?
The trend for most of my clients on the hedge fund side is going hard and fast after opportunities that are out there right now. I think on the distressed loan side there is less opportunity in the U.S. but a ton of opportunity in Europe, so a lot of the funds I represent are looking at the real estate opportunities there. I haven’t seen them look at the U.K., but I’ve seen interest in Ireland, Spain, Portugal and Italy.
In the U.S. there is caution on the lending side; everyone is aware that there are [many] lenders out there—bank and nonbank—and there is competition for good borrowers, good loans and good real estate. I think people are upholding strong underwriting standards and people are continuing to make [high-quality] loans because everyone still remembers the real estate crash. So while that is still at the back of everyone’s mind, people want to make [sound] loans and that may be slowing down the market to some extent.
The one other trend that has gone on for four or five years now is that lawyers used to be called and given a project, but in today’s world, we’re deal facilitators. We’re tasked with helping clients find deals because we may be working with borrowers or may know of borrowers that need loans. So introducing them to our lender clients is advantageous. Clients are thankful for that. It’s important to always keep your finger on the pulse of what is happening.
Are your special servicer clients busy with the maturity wall and a deluge of loans being transferred to their books?
Yes, I’m seeing that, and with respect to what we talked about earlier, that presents the opportunity for people to buy loans out of CMBS trusts—bondholders, controlling class holders or servicers. Quite frankly, I thought that was going to die down, but it seems to be picking up as borrowers can’t get refinanced.
Your clients are based all over the country, right?
I represent clients all over the U.S., and several of the funds I represent have gone overseas. We’re not currently doing work for them in Europe, but we have significant ability in our London office. They are setting up shop in London as an entry into the rest of Europe. Despite Brexit, it seems the most settled and where you can get the most sophisticated legal representation, as well as being a good base for operations.
Where do you see the opportunity lying in 2017?
There’s opportunity for bridge financing and a huge opportunity to collapse trusts and purchase loans out of the trusts and resecuritize these deals. So I think you’ll see a good bit of private securitization.
When I look at bridge financing from the outside, it is a market that is pretty saturated in that there are a lot of lenders out there and not a lot of product quite yet, but I do think with loan maturities and the inability to get long-term financing things will change and new players may show up. There will be increased lending opportunities when the election shakes out—right now there is a lot of money on the sidelines waiting to be deployed. The CMBS market will probably stay flat through the election with respect to new issuances; 2017 could be a busier year, once we get more clarity across the political and financial markets.
Your practice seems very diversified.
It is, and I think it’s important to be diversified because you want to create a recession-proof practice. So when the market is good you’re doing a lot of loan origination and securitization, and when it’s bad, you have the ability and history of working out bad loans and doing modifications.
I’m fortunate as the hedge fund clients I work with are really smart. They constantly diversify, and so they’ve taken advantage of market swings and constantly found ways to be successful despite what the market is doing at any time. In an up or down market, there is always opportunity, and I’m very lucky that my clients have been very successful in finding it.