Winston & Strawn’s Christine Spletzer Talks CMBS

Spletzer: I’m a partner in the real estate group and responsible for real estate capital markets matters. Our clients include financial institutions, real estate funds and other nonbank lenders. I’m involved wherever real estate and capital markets intersect. It could be by way of a public or private offering of debt or equity, anywhere that capital markets are used to facilitate real estate investment. That is where I come in.

How much of your work is focused on the CMBS market?

It varies. This year has been a little bumpy. Issuance was way down in the first half of the year, largely related to market dislocation in the first quarter. By midyear, people seemed more optimistic and spreads had stabilized, but there still seemed to be a lag before borrowers came back to the market; they seemed skittish. There seemed to be some repricing on rates in the first half—so if borrowers had another option to CMBS when the market stabilized they may have taken it. At this juncture, our clients on the CMBS side are reporting that there is much more borrower interest and we’re starting to see more deal flow. It’s promising to be a very active fall.

What are some of the challenges your clients have faced this year?

Some of our nonbank clients are having more difficulty in finding a capital markets exit. They have either slowed down or temporarily suspended origination until the exit becomes more viable. The bank originators are in a much better position because most conduit programs are run by large financial institutions that are risk-averse and looking to partner with other financial institutions. There seems to be a perception that the processes and methodologies of nonbank lenders may be less rigorous than a prudentially regulated institution. I don’t know if that is the case, but that is what I’ve heard.

Are you seeing any trends in the industry?

We are seeing a lot more balance sheet activity this year. With the balance sheet lenders we’ve seen competition for trophy properties and properties in prime markets. Often a couple of our clients are in the mix competing for the opportunity.

Our clients never stopped originating—it’s just that the mix shifted to balance sheet lending where there is more flexibility. Transactions often take quite a bit longer, however, because there isn’t an impending securitization exit on the horizon.

With regard to smaller CMBS players, there have already been some exits, and it’s likely we will see more. It may be the case that the door will open sometime next year, once a number of risk-retention-compliant deals have been done. Then lenders can get down to the business of originating and securitizing as opposed to working through the Dodd-Frank [ Wall Street Reform and Consumer Protection Act] regulations. Once the risk-retention regulations have been implemented and people understand the cost and have digested it, we’ll have a better sense of where the market is. It’s going to take a while.

What are your thoughts on the Wells Fargo Commercial Mortgage Trust, 2016-BNK1 deal?

I wasn’t involved in this transaction, but this is the first offering that is risk-retention compliant, although the regulations aren’t effective until the end of the year. Once the risk-retention rules are effective and a number of compliant offerings have been done, the market will decide what flavor of risk retention they like—whether it’s what Wells and its partners did on the BNK deal, issuer retention, or whether the B-piece exception is utilized. We may not know what investors prefer until the middle of next year.

And how about the CMBS maturity wall we’re currently moving through?  

One of the reasons that most of our CMBS clients haven’t been terribly concerned about originating less this year is that there are a lot more loans to refinance. Once we get through the next couple of years, everyone I speak with in the industry seems to think there will still be CMBS lending. Will we ever get back to the levels we were at pre-recession? Not clear at this juncture. It’s more expensive, and lenders now have to factor in the costs relating to risk retention. Those costs aren’t entirely clear yet.

Have your clients felt the impact of regulations such as Dodd-Frank?

There is certainly a knock-on effect. Clients say, “I am securitizing the same amount of loans pre-Dodd Frank. Why are you charging me more now?” Well, it’s taking twice as long to do deals, even though it’s the same number of loans, unfortunately. Instead of a one-month window, it’s taking four months.

 Can you give us examples of some transactions that are keeping you busy right now?

It has been a very different kind of year in terms of the work I do. In addition to involvement in some loan originations, I’m involved in a couple of restructurings of different securitizations. I’m also involved in a couple of litigations related to repurchase demands that loan sellers have received. In both cases—two different clients, two different types of loans, two different transactions—there was the commonality of the special servicer, which may or may not have bearing. In one case, our client received a repurchase demand alleging a failure to implement a lockbox. In short order, after speaking with origination counsel and our client, we determined that if this was the basis for the demand, then it was false—the lockbox was in place.

With a repurchase demand, the special servicer is alleging a breach of a representation [within a contract] that was made at securitization closing which materially and adversely affects the interests of the bondholders, the interest of the trust or the value of the mortgage loan or the property. In this case, a very limited investigation discerned that there was no basis for the demand and the demand was withdrawn. However, that client still has an obligation to report that they received a repurchase demand to the [U.S. Securities and Exchange Commission] and that it was withdrawn. They also need to report it in any public offerings that they participate in over the next three years.

The other repurchase litigation we’re working on also involves a rep breach, allegedly for failure to ensure that post-closing obligations relating to a loan origination were met—again relating to a lockbox account. In both cases, the loans were in default, and that seems to be how alleged rep breaches are uncovered: the loan is transferred to special servicing and the special servicer is incentivized to scour the file in an effort to maximize value to certificate holders. And they are able to come up with a basis for putting the loan back to the seller.

My firm has handled a significant amount of repurchase litigation on the defense side. Nobody ever wants to litigate over a $10 million loan. But our clients have felt that their reputation is being unfairly tarnished, and as a matter of principle, they want to stand up for themselves.

Have you added any new client types lately?

I started working with a client that invests in CMBS B-pieces. Since I have been involved in CMBS for more than 15 years, typically on the issuer or loan seller side, it’s a good change of pace to represent the investor who has real money at stake and to assist in negotiating a protective package of reps and warranties and control rights with the issuer.

What do you envision will be keeping you busy in 2017?

It’s difficult to say when 2016 has been such an unusual year! I certainly hope that CMBS issuance settles to a nice, steady hum so that the loan sellers I represent have a more steady flow than they had this year. I’m likely to be involved in some CRE CLOs [or collateralized loan obligations], too.

If you could only perform one kind of transaction for the rest of your life, what would you pick?

I really enjoy it all, whether it’s representing issuers, loan sellers or investors, representing buyers or sellers of loan portfolios or handling intercreditor arrangements. I wouldn’t like to focus on just one type of real estate-related work. I hope my career is as diverse as it currently is because it keeps it fresh and keeps me on my toes.