Transcript Client name date, 2009

Presentation of:
Relative Value in Securitized Investments
Insurer Investment Forum VIII
March 21, 2013
Insurer Investment Forum VIII
Agenda
I.
U.S. Macroeconomic Overview
II.
Securitized Investment Positioning and Risk within Insurance Strategies
III.
Relative Value in Asset-backed Securities (ABS)
IV. Relative Value in Commercial Mortgage-backed Securities (CMBS)
V.
The Housing Recovery and Non-Agency Residential Mortgage-backed-Securities (RMBS)
VI. Appendix
I.
Modeling Processes and Case Studies
II.
Biography
Page 1
Insurer Investment Forum VIII
The U.S. Macroeconomic Overview
An Overview of our Economic Forecast
● Despite larger than anticipated fiscal drag, we are maintaining our projection for 1.5% real GDP growth this year
 There has been improvement in the composition of growth over the past few quarters
> Private demand (e.g. consumer spending, business investment and housing) added 2.7% to growth in the 4 th quarter
 The economy may be poised to rebound from below trend growth from last year
> The economy grew at an annual rate of just 1.5% last year versus trend growth of 2.1% since the recovery began in
2009. It appears reasonable that in the long run, below trend growth would be offset by slightly higher trend growth
going forward.
● Our baseline for 2013 real GDP growth is in the 2.4% to 2.7% range.
 Subtract fiscal drag of 2.2% of GDP, which occurs mostly in the second and third quarter when sequestration hits
Page 2
Q1
Q2
Q3
Q4
2012 Actual GDP
2.0%
1.3%
3.1%
-0.1%
2013 Forecased GDP
1.5%
1.0%
1.3%
2.5%
Insurer Investment Forum VIII
The U.S. Macroeconomic Overview
January FOMC Summary
● Largely in line with market expectations.
● Fed views the economy on a moderate growth path with downside risks declining; however:
 Concern over automatic spending cuts associated with sequestration
● Household balance sheets are improving, which should support spending; though increases from payroll taxes could have a
negative impact
● More businesses reported an improvement in confidence and the prospects of an improved economic outlook
● Extensive and somewhat divided discussion about the efficacy of the Fed’s QE program
 Most participants believe asset purchases have been effective in easing financial conditions, though not as fast as the
Committee would like
 Some expressed concern over costs and risks arising from further asset purchases
 Some participants emphasized the Committee should be prepared to vary the pace of purchases, in response to either
changes economic outlook or efficacy and costs of such purchases
Page 3
Insurer Investment Forum VIII
Positioning and Risk within Insurance Strategies
Current Strategies and Positioning
● Most of our multi-sector insurance strategies are slightly short duration in the ten (10) year part of the curve (e.g. 0.1 – 0.2 of
year)
● Accounts are primarily underweight US Government and Agency securities while correspondingly overweight spread sectors
(e.g. Investment grade credit, ABS and CMBS)
● Securitized strategies within insurance mandates consist primarily of investment grade Auto and Equipment ABS, along with
well structured legacy CMBS and 2.0/3.0 and five (5) year new issue AAA-rated CMBS
● Given the richness of the new issue non-agency RMBS market and the ratings constraints of our insurance clients, we hold
minimal credit sensitive RMBS.
Page 4
Insurer Investment Forum VIII
Relative Value in Asset-backed Securities (ABS)
“It is not the return on my investment that I am concerned about. It’s the
return of my investment.” - Will Rogers
Page 5
Insurer Investment Forum VIII
Relative Value in Asset-backed Securities (ABS)
Consider the Investment Landscape and Current Market Challenges, Risks, and Needs:
● Investors face historic low levels of global interest rates
● Given the state of the global economy, monetary policy is likely to remain accommodative for the next several years
● Investors face asymmetric risk/return for extending duration out the yield curve. Real yields are in fact negative
● Investors must navigate continued fiscal turmoil in Europe’s peripheral economies
● Sovereign debt risks continue to pose potential for greater financial contagion, introducing increased counterparty risk
● Investors require a need for diversification, current yield, a return on investment, and critically, a return of investment
Page 6
Insurer Investment Forum VIII
Relative Value in Asset-back Securities (ABS)
Consumer Finance ABS
● Primary ABS Sectors:
 Automobile Loan and Lease securities
 Equipment Loan and Lease securities
 Bank Sponsored, and Retail Credit Card loan-backed securities
 Government and select private issued Student loan-backed securities
● The above asset classes represent historically some of the highest quality, best performing sectors, even during the peak of
the global financial crisis.
● Newly issued securities in these asset classes are generally characterized by conservative underwriting.
Page 7
Insurer Investment Forum VIII
Relative Value In Asset-backed Securities (ABS)
What Consumer ABS Investments Offer:
● High Quality and Strong Fundamentals:
 Strong historical credit performance, even during periods of unprecedented stress
 Investments backed by homogenous and diversified collateral pools that have been underwritten to conservative
standards.
 History of positive ratings actions
 While sovereign and corporate ratings under pressure since the onset of the crisis, the ABS ratings remains largely stable
to positive
● Liquidity:
 Self liquidating structures, special purpose bankruptcy remote structures that mitigate individual counterparty risks.
 Historically a safe haven for excess liquidity; returns above cash and money market instruments
 Short duration alternative to corporate debt
 Expected continued strong issuance (Note: $175 Billion in 2012)
 TRACE reporting enhances liquidity and increases transparency
● Attractive Risk/Yield Characteristics:
 Low interest rate duration risk (e.g. 1 – 3 years)
 Attractive yield spread premiums (e.g. margins of +15 to +150 bps vs. swaps or LIBOR based on defined risk
tolerances)
 A modest return on investment and the expected full return of principal
Page 8
Insurer Investment Forum VIII
Relative Value in Asset-backed Securities (ABS)
Consider the credit quality of ABS vs. other securitized investments
Structured Finance 12-Month Downgrade/Upgrade Rates by Sector*
12-Month Donwgrade Rate
2012
2011
2010
9.9%
9.1%
4.8%
6.5%
4.3%
4.8%
4.8%
2.2%
US Auto Loans
(*)
0.0%
0.0%
2.9%
(*)
21.8%
21.8%
6.0%
U.S. Credit Cards
(*)
0.0%
0.8%
2.0%
(*)
7.4%
7.4%
2.5%
U.S. Student Loans
(*)
6.6%
6.3%
4.5%
(*)
2.9%
2.9%
1.0%
U.S. Equipment Lease
(*)
0.7%
5.6%
4.3%
(*)
1.9%
1.9%
2.5%
11.5%
23.4%
36.5%
20.9%
2.8%
0.8%
0.8%
1.2%
Jumbo (post-1999 vintages)
(*)
35.7%
45.1%
20.5%
(*)
0.9%
0.9%
1.9%
Alt-A/Option ARM (post-1999 vintages)
(*)
17.2%
47.0%
33.9%
(*)
0.5%
0.5%
0.4%
Subprime (post-1999 vintages)
(*)
23.4%
24.9%
28.2%
(*)
1.4%
1.4%
0.7%
16.3%
11.1%
44.3%
14.5%
5.3%
2.8%
2.8%
6.4%
(*)
9.3%
39.1%
12.0%
(*)
2.8%
2.8%
6.8%
U.S. ABS excluding RMBS
U.S. RMBS/HEL
U.S. CMBS
excl CRE CDOs
Source: Moody’s as of December 31, 2012
*Moody’s to provide in March 2013; † Average to December 31, 2011.
Page 9
12-Month Upgrade Rate
Hist Avg†
2012
2011
2010
Hist Avg†
Insurer Investment Forum VIII
Relative Value in Asset-backed Securities (ABS)
Consider de-leveraging consumers and stronger household balance sheets:
Household Debt Service & Financial Obligations*
20%
18%
DSR
FOR
18.95
16%
15.74
14%
14.05
12%
10%
10.61
8%
● De-leveraging consumer household balance sheets should translate into continued strong credit performance
Source: Bloomberg, Federal Reserve as of January 25, 2013.
*DSR (Debt Service Ratio) - estimate of the ratio of debt payments on mortgage and consumer debt to disposable personal income.FOR( Financial Obligations Ratio) - takes DSR and
adds other payments such as auto leases, rents, homeowners insurance, and property taxes.
Page 10
Insurer Investment Forum VIII
Relative Value in Asset-backed Securities (ABS)
Tactical and Strategic
● ABS investments can be both tactical and strategic. Consider the tactical approach:
− Attractive return given lower term structure of interest rates
− Shorter duration. Asymmetric risks associated with extending duration out the curve (e.g. Long spread duration and
negative inflation adjusted returns
− Global economic and fiscal uncertainty
● The tactical play: As monetary policy shifts from accommodative, other more attractive investments may arise
● Conversely consider a strategic approach: ABS investments can be strategic and defensive against rising interest rates
Liquidity Considerations
● Tactical: If longer duration alternatives become more attractive, the tactical strategy can be easily unwound
− ABS duration “roll-down” (e.g. 0-1 years) allows for more liquid sales transactions
− ABS portfolios can be designed to self liquidate through amortization, eliminating need for sales, permitting
reinvestment of pay downs in other strategies
● Strategic: If short term rates rise, the ABS portfolio re-prices with the market
− Higher current coupons
− Low duration risk
− Less price sensitivity
Page 11
Insurer Investment Forum VIII
Relative Value in Asset-backed Securities (ABS)
Current Spreads and Yields:
Asset Class
WAL
Rating
Spread
to Swaps
Prime Auto
1yr
2yr
3yr
4yr
4yr
4yr
AAA
AAA
AAA
AA
A
BBB
6
10
14
40
60
110
Asset Class
WAL
Rating
Spread
to Swaps
Auto Lease
1yr
2yr
2yr
AAA
AAA
AAA
8
18
26
Page 12
Yield
0.39%
0.56%
0.79%
1.16%
1.37%
1.87%
Yield
0.39%
0.56%
0.79%
Asset Class
Subprime Auto
WAL
Rating
Spread
to Swaps
1yr
2yr
3yr
4yr
4yr
4yr
AAA
AAA
AA
A
BBB
BB
18
22
60
100
145
200
Asset Class
WAL
Rating
Spread
to Swaps
Equip. Lease
1yr
2yr
4yr
4yr
AAA
AAA
AAA
AA
10
19
24
58
Yield
0.49%
0.61%
1.08%
1.58%
2.11%
2.66%
Yield
0.45%
0.69%
1.01%
1.37%
Insurer Investment Forum VIII
Relative Value in Asset-backed Securities (ABS)
Current Spreads and Yields:
Asset Class
WAL
FFELP
Student Loan
1yr
3yr
7yr
9yr
Asset Class
Bank Credit Card
Page 13
WAL
3yr
3yr
5yr
5yr
Spread
Rating to LIBOR
AAA
AAA
AAA
A
17
25
55
225
Spread
Rating to LIBOR
AAA
BBB
AAA
BBB
15
40
26
60
Yield
0.37%
0.45%
0.75%
2.45%
Yield
0.35%
0.60%
0.46%
0.80%
Asset Class
WAL
Private
Student Loan
2yr
5yr
Asset Class
Dealer
Floorplan
Spread
Rating to LIBOR
AAA
AAA
60
105
WAL
Rating
Spread
to Swaps
3yr
3yr
3yr
3yr
AAA
AA
A
BBB
38
65
90
135
Yield
0.80%
1.25%
Yield
0.86%
1.13%
1.38%
1.83%
Insurer Investment Forum VIII
Relative Value in Commercial Mortgage-backed Securities (CMBS)
“I would give a thousand furlongs of sea for an acre of barren ground.”
-Shakespeare
Page 14
Insurer Investment Forum VIII
Relative Value in Commercial Mortgage-backed Securities (CMBS)
Fundamentals: Rent Growth and Vacancies
● Consider improving rent growth and declining vacancy rate among all major property types
Rent Growth
Vacancy Rates
Industrial
Multi-Family
Office
Retail
Industrial
4%
16%
3%
14%
2%
12%
1%
10%
0%
8%
-1%
6%
-2%
4%
-3%
2%
-4%
0%
Source: Amherst Securities Group LP, Property and Portfolio Research as of September 30, 2012.
Page 15
Multi-Family
Office
Retail
Insurer Investment Forum VIII
Relative Value in Commercial Mortgage-back Securities (CMBS)
Fundamentals: Net Absorption Rates
● Absorption rates remain positive among all major property types, with industrial and hotel showing stronger
upward momentum
National Net Absorption (SF) Rates (Retail, Office, Industrial)
Amidst U.S. Recessions
Retail
Office
Industrial
Hotel
1,500
300,000
1,450
(100,000)
1,400
1,350
350
250
150
1,300
1,250
1,200
(200,000)
1,150
(300,000)
1,100
Source: Source. Jeffries and CB Richard Ellis as of September 30, 2012. 2012 data is for
Multifamily
50
(50)
(150)
Multifamily (Units) x1000
100,000
Hotel (Rooms) x1000
400,000
200,000
Page 16
National Net Absorption Rates (Multifamily and Hotel )
Amidst U.S. Recessions
Insurer Investment Forum VIII
Relative Value in Commercial Mortgage-back Securities (CMBS)
Fundamentals: Cap Rates and Spreads
● Consider current cap rate spreads relative to 10-Year Treasuries. Cap rate spreads are poised to converge from historically
wide levels.
Cap Rate Spreads
10-Year Treasury
All Property Cap
All Property Spread
Long Term Avg
550
11%
500
Long Term
Average Spread 358 bps
450
9%
7%
350
300
5%
250
200
3%
150
1%
Source: Real Capital Analytics, Wells Fargo Securities, LLC as of December 31, 2012.
Page 17
100
Spread (bps)
400
Insurer Investment Forum VIII
Relative Value in Commercial Mortgage-back Securities (CMBS)
Fundamentals: Construction Spending
● Very low levels of construction spending will persist given continued problems with legacy construction loans.
Private Construction $ Millions Put In Place; Seasonally Adjusted US Census Bureau
Lodging
100,000
Office
Commercial
90,000
80,000
$ Millions
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec
2012*
* Preliminary
Source: U.S. Census Bureau as of December 31, 2012.
Page 18
Insurer Investment Forum VIII
Relative Value in Commercial Mortgage-backed Securities (CMBS)
● Consider the quality of newly originated commercial real estate loans. Today’s loans consist of much stronger credit
characteristics versus loans originated at the peak of the credit cycle (2006 through 2008)*
CMBS Loan Collateral Characteristics
2006 - 2008
Average
68%
50%
Current
Last 6 month
62%
21%
Interest Only Loans, including partial I/O
79%
40%
Debt Service Coverage Ratio (DSCR)
DSCR< 1.4 times
DSCR> 1.6 times
1.43
64%
16%
1.79
11%
51%
Average Rating Agency Stressed LTV
Subordinated Debt in place
Subordinated Debt permitted
104%
19%
28%
93%
11%
12%
Originated LTV
Loans with LTV > 70%
* Data as of February 14, 2013. Source: Standish, Trepp® and deal prospectuses. 2006-2008 and past 6 months are for fixed rate conduit transactions only.
Page 19
Insurer Investment Forum VIII
Relative Value in Commercial Mortgage-backed Securities (CMBS)
Current Spreads and Yields:
Asset Class
Legacy CMBS
LCF AAA
Legacy AM
Asset Class
Agency CMBS
Vintage
WAL
Spread
to Swaps
2005
2006
2007
2006
2007
2yr
3yr
4yr
3yr
4yr
60
70
110
200
225
WAL
Rating
Spread
to Swaps
3yr
4yr
5yr
5yr
AAA
AAA
A
BBB
18
21
140
250
Yield *
0.98%
1.21%
1.81%
2.51%
2.96%
Asset Class
WAL
Rating
Spread
to Swaps
New Issue
Conduit CMBS
2yr
5yr
7yr
10yr
10yr
10yr
10yr
10yr
AAA
AAA
AAA
AAA
AAA-S
AAABBB-
25
50
85
85
120
150
200
375
Yield *
0.70%
0.91%
2.23%
3.33%
* Based on US Swap curve, mid day 3/6/2013
* Data as of February 14, 2013. Source: Standish, Trepp® and deal prospectuses. 2006-2008 and past 6 months are for fixed rate conduit transactions only.
Page 20
Yield *
0.63%
1.45%
2.29%
2.85%
3.20%
3.50%
4.00%
5.75%
Insurer Investment Forum VIII
The Housing Recovery and Non-Agency RMBS
“The dream of our older generation was to pay off the mortgage. The dream
of our current generation is to get one.” - Unknown
Page 21
Insurer Investment Forum VIII
The Housing Recovery and Non-Agency RMBS
Existing Home Inventory
4.50
4.00
3.50
Millions
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Source: National Association of Realtors as of January 31, 2013
● Supply is beginning to reach an equilibrium with demand.
● Over-supply was result of over-building when home prices were rising and high defaults when home prices were declining.
● Existing home sales inventory has fallen to 1.74 million homes* from a peak of 4.04 million homes in July 2007. This is now
close to historical norms.
● Shadow Inventory is the number of properties that are either in foreclosure or real estate owned but not listed for sale.
Shadow inventory is down 34% since the peak of 5.370 million home in January Q4 2009.
● We expect the shadow inventory to continue to decline, leading to less distressed sales.
* Source: National Association of Realtors as of January 2013
Page 22
Insurer Investment Forum VIII
The Housing Recovery and Non-Agency RMBS
U.S. Sales
8.0
140
1.4
7.0
130
1.2
6.0
120
1.0
5.0
110
0.8
4.0
100
0.6
3.0
90
0.4
2.0
80
0.2
1.0
70
0.0
0.0
60
1.6
Millions
Pending Home Sales
New Home Sales
Existing Home Sales
Source: National Association of Realtors, US Census Bureau as of January 31, 2013
Source: National Association of Realtors as of January 31, 2013
● Home sales have been trending upward for several months.
● Existing home sales are up 1.9% in January 2013 versus a year ago.
● New home sales have risen 28.9% in January 2013 versus a year ago, but are still close to historic lows.
● Pending home sales, which tracks the number of home re-sales under contract, have been increasing. Pending home sales
is a leading indicator of existing home sales by one or two months.
Page 23
Insurer Investment Forum VIII
The Housing Recovery and Non-Agency RMBS
NAR Homebuyer Affordability Index
225
Index
Household Formation
118,000
Average
Households
Trend
200
116,000
175
125
100
114,000
Thousands
150
112,000
110,000
75
50
108,000
106,000
Index at 100: Median income household has exactly enough income to qulify for the purchase
of a median-priced exting single family home. Assumptions: 20% downpapayment, 25% gross
income devoted to mortgage principal & interest payments.
Source: National Association of Realtors as of December 31, 2012
104,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Standish, US Census Bureau as of December 31, 2012
● Home affordability is close to all-time highs. High levels of affordability have traditionally translated into more home sales
● At the current level of the NAR Homebuyer Affordability Index, a borrower who earns the median income in the U.S. can
afford 201% of a median-priced existing single family home
● Lack of job growth during the recession led to many echo boomers, those born between 1982 and 1995, staying at home
or renting. New household formation ran below trend from 2007-2011 and suggests that lack of demand was one of the
causes of the excess housing supply.
● Estimates are that actual household formation is more than two million households below trend. We expect that an economic
recovery will boost the momentum in housing as this pent-up demand eventually absorbs the excess housing inventory.
Page 24
Insurer Investment Forum VIII
The Housing Recovery and Non-Agency RMBS
Home Price Indices
220
CoreLogic
Case Shiller (SA)
200
Price Index
180
160
140
120
100
Source: Core Logic, S&P as of December 31, 2012
● Home prices are a lagging indicator of a housing recovery, but the data is starting to turn more positive.
● The Case Shiller Index is up 6.8% in December 2012 from December 2011. The CoreLogic Home Price Index rose 8.3% in
the same period.
● Median prices on existing and new home sales are also rising. The median price of existing homes is up 12.3% in January
from a year earlier. The median price of new homes is up 2.1% in January from a year earlier.
● The mix of sales has contributed to the better year-over-year home price numbers. There have been fewer distressed home
sales, as well as an improvement in pricing on distressed sales. Modification programs, increased short sales, and REO to
Rental programs have all helped to improve pricing on sales.
● We still expect seasonal weakness through the winter, but feel that prices have bottomed and should begin rising in 2013.
Page 25
Insurer Investment Forum VIII
The Housing Recovery and Non-Agency RMBS
Current Spreads and Yields:
Asset Class
Non-Agency RMBS
SEMT Jumbo-A
WAL
Rating
Spread
to Tsy
5yr
5yr
5yr
AAA
AAA
AAA
112
114
117
Yield *
1.99%
2.10%
2.02%
Asset Class
WAL
Rating
FNCL 3.00%
FNCL 3.50%
7yr
5yr
AAA
AAA
* Based on Tsy market data at time of SEMT pricing, using Standish prepayment assumptions
* Data as of February 14, 2013. Source: Standish, Trepp® and deal prospectuses. 2006-2008 and past 6 months are for fixed rate conduit transactions only.
Page 26
Spread
to Tsy
118
140
Yield *
2.50%
2.16%
Appendix
ABS Modeling Process
Standish’s ABS modeling process is a comprehensive approach that considers issuer-specific collateral credit
and prepayment behavior, while also considering deal- and vintage- specific characteristics. Its process is
dynamic and continuously calibrated to consider the effects of changing collateral performance, loan prepayment
patterns, and servicer behavior. Highlights of our process include:
● Expected Loss
 Loss to liquidation projection.
 Assumptions periodically adjusted to reflect changing collateral performance.
● Default Propensity
 Default timing curves fit to modeled deal expected loss.
 Adjusted for issuer, collateral characteristics, and macro environment.
● Loss Severity
 Collateral and vintage specific assigned severities.
 Adjusted periodically given performance and outlook for after market disposition.
● Voluntary Prepayments
 Collateral and vintage specific assigned speeds.
 Pricing speeds adjusted to incorporate expected defaults (involuntary prepays).
● Other
 Intex used as primary cash flow engine.
 Utilize third party and internally developed research to analyze collateral at a granular level.
 A multi-scenario approach to evaluate risk across a range of outcomes.
Page 27
Appendix
ABS Investment Process Example – Auto ABS
Case Study: 2010 Vintage Subprime Auto
ABS C Tranche
COLLATERAL SNAPSHOT
Weighted Average FICO: 590
Weighted Average APR: 18.2%
Weighted Average LTV: 113%
Used Vehicles: 68.7%
INITIAL CREDIT ENHANCEMENT
Weighted Average Loan Balance: $14,341
Weighted Average Loan Seasoning: 8 mos
Loans with original terms > 60 mos: 70%
Chevy: 18.2%, Ford: 11.3%, Dodge: 11.2%
AAA
AA
A
BBB
43.5%
32.5%
21.0%
15.0%
Estimated excess spread per year = 11.3%
Initial overcollateralization = 13% of initial balance
Target overcollateralization = 23.25% of current balance
RATING AGENCY EXPECTED DEAL NET COLLATERAL LOSS:
S&P = 13.25% - 13.75%
Moody's = 16%
Projected Net Collateral Loss
Deal Level:
Base Scenario = 14.5%
Stress Scenario = 19.4%
Bond Level (C Class):
Base Scenario = 14.1%
Stress Scenario = 18.9%
Average Life Variability
To Maturity
To 10% Call
Base Scenario
Stress Scenario
1.77yr
1.72yr
1.74yr
1.68yr
Break-Even Analysis
Flat Default Rate:
Break-Even Default Rate
Break-Even Cumulative Net Loss
Loss Multiple/Internal Rating
BASE
37.9
34.0%
2.4x/A
STRESS
32.2
35.7%
1.9x/BBB
Default Curve:
Break-Even Default Curve
Break-Even Cumulative Net Loss
Loss Multiple/Internal Rating
BASE
287x
34.7%
2.5x/A
STRESS
238x
36.4%
1.9x/BBB
CONCLUSION: Tighter issuer underwriting standards and higher required credit enhancement from the rating agencies should help this deal
perform at least in-line with historical issuance. Our stress scenario attempts to approximate what a 'double-dip' scenario may look like and
assumes a repeat of the increased default rates seen in 2008/2009. We are comfortable that this harsh scenario results in implied ratings that are
only one rating category below our base case ratings. Given the de-leveraging nature of the structure, the break-even default rates will increase
over time and provide added protection to these deals.
Standish, Intex as of December 2012. This case study is representative of a type of ABS investments owned and managed in client portfolios, and highlights the fundamental drivers of our
investment process.
Page 28
Appendix
ABS Investment Process Example – Auto ABS
Default Rate
16
Severity Rate on Defaults
Base Case Default Curve
Base Case Severity Rate
Actual Default Rate
14
60
12
50
10
Axis Title
Axis Title
Actual Severity Rate
70
8
6
40
30
4
20
2
10
0
0
Strength of Structure
Axis Title
Credit Enhancement
Standish Break-even Default Rate
100
90
80
70
60
50
40
30
20
10
0
Standish, Intex as of December 2012. This case study is representative of a type of ABS investments owned and managed in client portfolios, and highlights the fundamental drivers of our
investment process. Timeline Notes: Dec 2010 - Changed base case default assumption to 80% of initial curve; Mar 2011 - Changed base case default assumption to 60% of initial curve;
May 2011 - Changed base case default assumption to 50% of intial curve & base case severity assumption to 60%; Aug 2011 - Moody's rating raised from A1 to Aaa; Dec 2011 - S&P rating
raised from A to A.
Page 29
Appendix
Sample Model Output – Auto ABS
Name:
2010 Vintage Subprime Auto ABS C Tranche
Rating:
Aaa/AAA/NR
Original Face:
79,308,000
Current Face:
79,308,000
Tranche Factor:
1.0000
Coupon/Coupon Type:
5.19%
Fixed
Collateral Description:
SubPrime
Structure:
Sequential Pay
Delinquency Performance Summary:
Collat
Group
Month
WALA
30
60
90+
Total 60+
DQ
1M CDR
1M ABS
ALL
ALL
ALL
Jan-13
Dec-12
Nov-12
43
42
41
8.7%
7.4%
7.6%
1.5%
1.3%
1.2%
0.4%
0.3%
0.3%
1.8%
1.6%
1.5%
6.79
7.13
8.81
1.08
1.21
1.29
1M Severity Cum Loss
45.3%
46.2%
56.9%
5.14%
5.07%
4.99%
Collateral Summary:
FICO
New
Used
590
31.3%
68.7%
Modeling Assumptions:
Pool Loss Proj (Loss to Liquidation):
Pool Loss Proj (Base Case):
Prepayment Curve:
Default Curve:
Severity
Orig Loan
Bal
14,341
APR
18.23%
Orig WAM Seasoning Orig Term 0State1
at Issuance at Issuance
60mos
68.0
8.0
30.0%
TX: 18.6%
State2
CA: 10.3%
7.0%
6.6%
1 ABS
8 CDR
60%
Standish, Intex as of December 2012. This case study is representative of a type of ABS investments owned and managed in client portfolios, and highlights the fundamental drivers of
our investment process.
Page 30
CE
46.0%
45.0%
44.0%
CE/Cum
Loss
Coverage
9.0
8.9
8.8
Appendix
Sample Model Output – Auto ABS
Scenario Results:
Base
Stress
Best
Base-Call
Price
Yield
ABS
Default
Severity
WAL (Yrs)
Window
Start
Window
End
$103.95
$104.18
$103.62
$103.86
1.0%
1.0%
1.0%
1.0%
1 abs
0.8 abs
1.2 abs
1 abs
8cdr
9.6cdr
6.4cdr
8cdr
60%
70%
50%
60%
1.0
1.0
0.9
0.9
Jun-13
Jul-13
Jun-13
Jun-13
Aug-14
Sep-14
Jun-14
May-14
Class Break Loss (% current bal):
Break loss %/ Base loss%:
48.1%
9.9x
Break Loss CDR:
Break loss CDR/ 3mo avg CDR:
Bond
Bond
Pool
Pool Loss% Writedown Writedown
Default%
$
%
8.1%
6.4%
$0
0.0%
10.3%
7.1%
$0
0.0%
5.8%
5.9%
$0
0.0%
7.4%
6.3%
$0
0.0%
90.1
11.9x
Standish, Intex as of December 2012. This case study is representative of a type of ABS investments owned and managed in client portfolios, and highlights the fundamental drivers of
our investment process.
Page 31
Appendix
CMBS Cash Flow Modeling Process
Standish’s CMBS modeling process is a comprehensive approach that utilizes a combination of structural and
loan-level analysis. Its process is dynamic and continuously calibrated to consider the effects of property income,
refinancing and modification options, and servicer/special servicer behavior. Highlights of our process include:

Default Propensity
− MSA and property type specific NOI vectors, cap rate assumptions, and refinance requirements
determine involuntary term defaults and balloon extensions
− Factor adjustments for modification and servicer behavior

Loss Severity
− Customized default timing and severity expectations based on vintage and status
− Calibrated for modification and servicer/special servicer behavior
− Dynamic collateral loss severity, formulated through capital markets refinance methods

Voluntary Prepayments
− Call protection and voluntary prepayments
− Evolution of cap rates
− Term structure of interest rates, yield curve shape, and volatility

Other
−
−
−
−
Page 32
Trepp used as primary cash flow engine
Other structural features including credit enhancement, transaction triggers, covenants and other factors
Utilize third party and internally developed research to analyze collateral at a granular level
A multi-scenario approach to evaluate risk across a range of probable outcomes
Insurer Investment Forum VIII
CMBS Case Study: 2005 Vintage AJ Tranche
Collateral Analysis
Property Type
Deal Structure
Feb '13
Aug '05
31.9
26.9
17.0
8.7
6.0
1.9
2.1
0.1
5.3
35.2
23.3
15.3
8.2
11.2
3.9
2.8
0.1
-
Amortization Type
Amortiznig Balloon
Full I/O
Partial I/O
Feb '13
39.8
42.7
17.5
Aug '05
41.6
41
17.4
State
NY
CA
FL
TX
NM
Feb '13
35.3
15.4
7.2
6.6
5.7
Aug '05
31.6
14.3
7.9
6.2
5.4
Credit Stats
LTV
DSCR
Feb '13
86.3
1.31
Aug '05
71.5
1.46
Retail
Office
Mixed Use
Self Storage
Multi-Family
Lodging
Industrial
Other
Defeased
Tranche Coupon
A1
A2A
A2B
AAB
A3
A4A
A4B
A1A
AJ
B
C
D
E
F
G
H
J
K
L
M
N
O
P
Q
S
4.6
4.9
4.9
5.0
5.4
5.0
5.0
4.9
5.1
5.2
5.2
5.2
5.2
5.3
5.4
WAC
WAC
WAC
4.8
4.8
4.8
4.8
4.8
4.8
4.8
Balance
Original
Balance
Current Feb '13
Factor
Feb '13
Orig S/F
121,200,000
294,875,000
42,125,000
111,100,000
103,000,000
1,060,595,000
151,514,000
318,834,000
175,571,000
24,098,000
34,425,000
27,541,000
24,098,000
27,541,000
27,540,000
34,426,000
30,983,000
41,311,000
10,327,000
10,328,000
17,213,000
3,442,000
10,328,000
10,328,000
41,311,199
0
74,547,016
42,125,000
49,271,000
103,000,000
1,060,595,000
151,514,000
171,133,282
175,571,000
24,098,000
34,425,000
27,541,000
24,098,000
27,541,000
27,540,000
34,426,000
30,983,000
41,311,000
10,327,000
10,328,000
17,213,000
3,442,000
614,158
0
0
0.25
1.00
0.44
1.00
1.00
1.00
0.54
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
0.06
-
AAA/AAA
AAA/AAA
AAA/AAA
AAA/AAA
AAA/AAA
AAA/AAA
AAA/AAA
AAA/AAA
AAA/AAA
AA+/AA+
AA/AA
AA-/AAA+/A+
A/A
A-/ABBB+/BBB+
BBB/BBB
BBB-/BBBBB+/BB+
BB/BB
BB-/BBB+/B+
B/B
B-/BNR/NR
Credit
Credit Enhancem
Cum Bond Accum Int Enhancem
ent
Current S/F
Loss
Shortfall
ent
Current
Feb '13 Amt Feb '13
Feb '13
Secur
Feb '13
NR/PIF
AAA/AAA
AAA/AAA
AAA/AAA
AAA/AAA
AAA/AAA
A+/AAA
A+/AAA
BBB-/A
BB+/BBB
BB/BBBBB-/BB
B+/B
B/CCC
B-/CCC
CCC/CCC
CCC-/CCC
D/CC
D/C
D/C
D/C
D/C
D/D
D/D
-/NR
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
9,713,842
10,328,000
41,311,199
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
157,464
2,356,480
1,186,951
1,187,066
1,990,043
409,254
1,083,827
710,382
1,846,027
20.0
30.0
20.0
20.0
20.0
30.0
20.0
20.0
13.6
12.8
11.5
10.5
9.6
8.6
7.6
6.4
5.3
3.8
3.4
3.0
2.4
2.3
1.9
1.5
-
2.2%
●
●
●
●
This is a typical 2005 deal with three tiers of original "AAA" bonds; 30% "last cash flow", 20% "AM/A4B", and 13.6% "AJ”.
Deal losses have accumulated to 2.2% of original balance, typical for a 2005 vintage deal.
Paydowns, amortization and liquidations have increased AJ credit enhancement over time.
Appraisal reductions to limit advances, and coupon modifications have caused interest shortfalls that are affecting up to class J.
Source: Trepp as of February 2013. This case study is representative of a type of CMBS investments owned and managed in client portfolios, and highlights the fundamental
drivers of our investment process.
Page 33
22.9
50.7
22.9
22.9
22.9
32.5
22.9
22.9
14.7
13.5
11.9
10.6
9.5
8.2
6.9
5.3
3.9
2.0
1.5
1.0
0.2
0.0
-
Appendix
CMBS Case Study: 2005 Vintage AJ Tranche Performance Trends
50
25
Apr '12 Standish buys from CDO
40
20
30
15
20
10
10
Collateral on Servicer Watchlist (L axis)
Deal Losses (R axis)
DQ+ SS (R axis)
Modified (R axis)
0
5
0
Since purchase:
● Monthly losses have been trending down
● Total deal losses have been rising more slowly than prepayment, resulting in improved enhancement metrics.
●
DQ/SS, modified and servicer watchlist exposure have all slowly trended down, resulting in an improved outlook.
Source: Trepp as of February 2013. This case study is representative of a type of CMBS investments owned and managed in client portfolios, and highlights the fundamental
drivers of our investment process.
Page 34
Appendix
CMBS Case Study: 2005 Vintage AJ Tranche Modeling Assumptions
Sample Model Output - Conduit CMBS
Name:
Rating:
Orig Face:
Current Face:
TrancheFactor:
Coupon/Type:
Collateral Description:
Structure:
Scenario
Base
Worst
Best
2005 Vintage AJ Tranche
BBB-/A
175,571,000
175,571,000
1.00
5.073% fixed
Fixed rate Conduit CMBS
Sequential
2yr NOI Growth
Rates
MSA/Property Type specific
MSA/Property Type specific
MSA/Property Type specific
Refinance Terms
Apartment
RT/OF/IN
Loan
Loan Cap Rate
Post 2 yr
Spread to
Spread to Change/yr Months to Months to
Growth % DSCR
LTV
10 yr Ave DSCR
LTV 10 yr Ave
for 4 yrs
Default
Extend
2% 1.25
70
0 1.30
65
0.00%
-0.25%
12
18
0% 1.30
65
0.50% 1.40
60
0.50%
0.50%
12
18
3% 1.20
75
-0.50% 1.25
70
-0.50%
-0.50%
12
18
● Modified “hopes notes” are assumed to be written off at maturity
● Large non-performing loans and performing but specially serviced loans are assumed to be modified with 10% loss, 10%
paydown and 2 year extension with 20% severity.
● Medium to small non-performance loans and performing but specially serviced loans are assumed to be liquidated within a
18 months horizon with 50% severity.
● Always performing loans are assumed to default if Debt Service Cover Ratio (DSCR) is less than 0.95, with a loss severity
dependant on property value and remaining balance.
● Currently performing and not specially serviced loans are projected to extend if estimated refinancing proceeds are less than
the balance at maturity.
Source: Trepp as of February 2013. This case study is representative of a type of CMBS investments owned and managed in client portfolios, and highlights the fundamental
drivers of our investment process.
Page 35
Appendix
CMBS Case Study: 2005 Vintage AJ Tranche Modeling Output
Name:
2005 Vintage AJ Tranche
Rating:
BBB-/A
Orig Face:
175,571,000
Current Face:
175,571,000
TrancheFactor:
1
Credit Enhancement
0.14656
Coupon/Type:
5.073% fixed
Collateral Description: Fixed rate Conduit CMBS
Structure:
Sequential
Scenario Results
Deal
Loss
Yield
WAL
Window
Base
104.46875
0.03805
3.859
12/16-01/17
0.07
0.10496
0
AAA
0.51
6.79%
28.89%
0.13
Stress
104.46875
0.03816
3.894
01/17-01/17
0.10
0.09018
0.00%
A
0.35
6.79%
45.38%
0.13
Best
104.46875
0.03546
3.178
07/15-12/16
0.06
0.11709
0.00%
AAA
0.72
6.79%
8.27%
0.13
Low C/E
Tranche Standish
%
Loss Rating Performs % Defaults % Extends
% non subject
to credit
model†
Current
Market Price*
● Price increase from $98.2 on 4/26/2012 to $104.5 on 2/15/2013.
● No loss expected, with expected remaining Credit Enhancement of at least 9%.
● Standish internal rating of A to AAA, signaling upgrade potential.
● Loss-adjusted yield to maturity from 3.50% to 3.80%.
Source: Trepp as of February 2013. This case study is representative of a type of CMBS investments owned and managed in client portfolios, and highlights the fundamental drivers of
our investment process.
* Purchased on 4/26/2012 at $98.2
† Includes defeased loans and liquidating dq/ss/modified loans
Page 36
Appendix
Biography
Thomas Graf, CPA
Tom is Managing Director and Senior Portfolio Manager for Global Securitized Strategies. He is responsible for overseeing Standish's securitized
investments that include non-agency residential mortgage-backed (RMBS), commercial mortgage-backed (CMBS) and consumer asset-backed (ABS)
securities. In addition, Tom leads Standish's Global Workout Solutions business, a fiduciary advisor service for institutions holding distressed and
illiquid assets. Tom joined Standish in 2008 from Gulf Stream Structured Advisors, where he was Chief Investment Officer and Senior Portfolio
Manager. Prior to joining Gulf Stream in 2006, Tom was Director of Securitized Products and Senior Portfolio Manager for Wachovia Corporation.
At Wachovia Tom actively managed over $16 billion of non-agency securitized investments that were part of total return and interest rate risk
management strategies. Prior to joining Wachovia in 1992, Tom was a certified public accountant for both Price Waterhouse and KPMG. Tom holds
a B.S. degree from The University of Akron. He has 26 years of combined finance and investment management experience.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Page 37
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