Interviews May 2, 2016

Bob Sullivan Points to the Choppy CMBS Market and the Uncertainty that Lies Ahead

Bob Sullivan, chair of Alston & Bird’s Finance Group, discusses CMBS market volatility ahead of the firm’s May 11 Finance Forum.

Why is risk retention still a hot topic for the market?

We will be discussing risk retention until the market settles. Compliance is required by December 24, 2016, but it could still be an issue after that based on how folks are implementing programs and what works or seems to work and what doesn’t. We titled the panel “What’s the Big Deal?” because many folks view this just as an additional regulatory requirement, but it is more than that and affects the way securitizations will be priced and structured, which is a big deal.

Do you see many issuers pursuing the vertical 5 percent option?

Early voting seems to favor the horizontal option, but many banks are looking hard at the vertical option for other regulatory reasons and have yet to fully weigh in on the choice. One client emphatically told me, “I am not buying a piece of a slice and having to deal with the unforeseen issues that may present.” The vertical option may also cause servicing, rating and reporting concerns.

Who wants to be a B-piece buyer anymore?

The requirement may clean out the market and present greater opportunities for some institutions. Certainly credit will be looked at much more closely, and if the hold period is not a concern, which it is for many funds and funding vehicles, the risk-retained piece may be better-looking than initially anticipated. The biggest downside to that is further liquidity loss in a market whose fundamental premise is liquidity.

What’s a sponsor to do with their liquidity if CMBS is less attractive?

Go somewhere else or find a partner and a deal that makes liquidity more attractive. Due diligence will certainly be at a premium, and we are already starting to see that.

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