cmbs market watch weekly
TRANSCRIPT
ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER
IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
12 July 2012
Fixed Income Research
http://www.credit-suisse.com/researchandanalytics
CMBS and CMBX spreads and prices
CMBS swap spread
1-wk chg
Trailing 12-month
7/10/12 Min Max Avg
AAA 5yr 260 0 260 350 293
AAA 10yr 200 0 180 355 244
GG10 A4 239 -1 213 390 279
AM 425 0 350 825 534
AJ 1250 -25 890 1775 1401
CMBS price
AA 10yr 45 0 38 52 44
A 10yr 27 0 23 32 27
BBB 10yr 15 0 14 16 15
BBB- 10yr 11 0 9 11 10
New issue CMBS*
AAA 5yr (30% CE) 105 0 100 185 120
AAA 10yr (30% CE) 145 0 100 185 133
AAA Junior 195 0 175 340 245
AA 265 0 230 515 322
A 420 0 320 615 436
BBB- 700 0 575 815 672
CMBX.3
AAA 92.5 -0.1 85.3 94.3 90.8
AM 83.0 -0.4 70.8 86.0 80.1
AJ 61.9 0.0 51.4 74.0 62.2
BBB 9.4 -0.1 9.3 14.0 11.1
BBB- 7.7 0.0 7.7 12.8 9.4
* Partial trailing 12-month data; data series starts in September 2011 Source: Credit Suisse, Markit
Research Analysts
Roger Lehman
+1 212 325 2123
Serif Ustun, CFA
+1 212 538 4582
Sylvain Jousseaume
+1 212 325 1356
Tee Chew
+1 212 325 8703
CMBS Market Watch Weekly
Securitized Products Americas
Market activity and relative value
The CMBS market largely met our performance expectations during the first
half of 2012. Despite spreads being tighter today than they were at the start
of the year, we still believe CMBS remains attractive, offers good relative
value and, barring a large negative macro event, can continue to see
spreads narrow in the second half.
Furthermore, we would argue that CMBS, while still exposed to such shocks
may now have less sensitivity than a year ago.
While there remain potential obstacles to further spread tightening, we
believe the positives outnumber the negatives for at least certain portions of
the CMBS capital stack and look for them to perform well.
Specifically, in the legacy sector, we still favor the wider-trading super-
seniors, the mid- and wider-name AMs, as well as select AJs. We also
continue to believe there is good value in the new issue CMBS market as
well as certain parts of the agency CMBS universe.
We also believe CMBX.3 AJs have gotten cheap to both CMBX.4 AJs and
CMBX.3 AMs.
We continue to believe, as we did at the start of the year, that given the
outlook for a continued low-growth, low interest rate environment, we expect
commercial real estate prices to remain near their current levels.
We also take a first look at CRE Fundamentals in 2Q from the preliminary data.
CMBS loans in the news
The Skyline Portfolio showed an appraisal of just $296.6 million, according
the July remittance report for GECMC 2007-C1. Give the erroneous reported
value in April, we are looking to confirm that number. The reports indicate a
brief forbearance and ongoing modification discussions.
RXR is reportedly buying 450 Lexington Avenue (CSMC 2007-C5 and
CSMC 2008-C1). After a short maturity extension, we think it likely the loan
will payoff.
The Nestle 94 Pool (WBCMT 2007-C34) is being restructured and will
probably be modified.
We also discuss some updates on Bank of America Plaza (CGCMT 2006-C4),
2100 Ross (WBCMT 2007-C34), and Tower at Erieview (BSCMS 2006-
PW12).
12 July 2012
CMBS Market Watch Weekly 2
Market activity and relative value
CMBS activity was very light during the first week of the new quarter, with the
Independence Day holiday resulting in many taking time off and low transaction volumes.
However, CMBS activity in the prior week was at least relatively higher than it had been
recently and the market finished the first half of the year on a strong note, with tightening
spreads.
While trading volumes have been up slightly over the past two days, as the TRACE data in
Exhibit 1 shows, they still remain at the lower end for the year. Spreads are also slightly
tighter over the past few days. The market appears to be shaping up for lighter volumes
throughout the summer months if June’s experience can be extrapolated. This would be in
contrast to last summer where general financial market volatility drove trading levels up
(and spreads wider).
Exhibit 1: Trading volume remains at the lower end of this year’s range
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
7/1
0/1
2
6/2
5/1
2
6/1
1/1
2
5/2
5/1
2
5/1
1/1
2
4/2
7/1
2
4/1
3/1
2
3/2
9/1
2
3/1
5/1
2
3/1
/12
2/1
5/1
2
2/1
/12
1/1
8/1
2
Daily volume
5-day average trading volume
Source: Credit Suisse, FINRA
CMBS is still attractive; spreads should narrow further
The CMBS market largely met our performance expectations during the first half of
2012. In our 2012 Year Ahead Outlook, we noted that “despite an environment where
financial market volatility is likely to remain high, we believe commercial real estate
fundamentals can stabilize and that CMBS spreads can tighten this year, although
perhaps not in a straight line”.
Despite spreads being tighter today than they were at the start of the year, we still
believe CMBS remains attractive, offers good relative value and, barring a large
negative macro event, can continue to see spreads narrow in the second half. We show
spread performance for the originally-rated triple-A legacy conduit market in Exhibit 2 and
Exhibit 3.
12 July 2012
CMBS Market Watch Weekly 3
Exhibit 2: While legacy spreads tightened in H1… Exhibit 3: … they had bouts of widening
100
150
200
250
300
350
400
Dec-1
0
Fe
b-1
1
Ap
r-11
Jun
-11
Au
g-1
1
Oct-
11
Dec-1
1
Fe
b-1
2
Ap
r-12
Jun
-12
2007 10Y AAA super senior
bp
100
350
600
850
1100
1350
1600
1850
Dec-1
0
Fe
b-1
1
Ap
r-11
Jun
-11
Au
g-1
1
Oct-
11
Dec-1
1
Fe
b-1
2
Ap
r-12
Jun
-12
2007 AJ
2007 AM
bp
Source: Credit Suisse Source: Credit Suisse
The concerns about an event-driven widening are not only important, but very relevant.
One only needs to look at the sector’s performance in the second half of last year as a
reminder of how CMBS spreads can move when financial market volatility increases.
While the list of potential disruptions is fairly long (euro sovereign risk, a slowdown in the US
or global economy, November’s elections, the fiscal cliff, regulatory changes – to name just
some) most of these are exogenous to CMBS and will affect spread products in general.
Furthermore, we would argue that CMBS, while still exposed to such shocks may
now have less sensitivity than a year ago. One reason that shock-induced CMBS
spread volatility may be lower today than it was last year is, we believe, that portions of the
capital stack have gravitated toward investors with longer-term horizons (the “stronger
hands” theory).
Related to this notion, there appears to be a change in ownership and a decline in
risk held on dealer’s balance sheets as well. As we have stated in the past, we believe
that FINRA-reported numbers do not fully capture all trades (such as new issue trades or
the recent CDO unwinds), but they do provide a guidepost. After correcting for the new
issue transactions to the extent we can, the data would suggest that dealers have seen a
large reduction, at least in the aggregate, in their holdings of below investment grade rated
bonds. This is corroborated by anecdotal evidence as well.
Credit problems may decelerate in H2 (at least optically)
While some of the potential shocks we listed come from outside the CMBS world (or even
the US), the market is not immune to an economic slowdown or decline in real estate
fundamentals that can lead to greater credit problems within CMBS. In a section below, we
review some of the preliminary second quarter statistics on real estate fundamentals.
One of our concerns for the market that we highlighted going into this year – an
acceleration of new credit problems – has come to fruition. Our thinking was that
many of the headline credit statistics, such as the delinquency rate, which stabilized at the
end of 2011, would start to rise in H1 2012 due to the large amount of five-year term loans
set to mature. As we have discussed numerous times over the past several months, the
wave of 2007 maturing loans is largely a first half phenomenon.
Additionally, we expect to see continued loan resolutions from modifications, liquidations
and note sales during the second half that will help to reduce the headline delinquency
measures. As we previously discussed, loan sales through the auction process has been a
12 July 2012
CMBS Market Watch Weekly 4
powerful tool in disposing of delinquent and REO loans. As we show in Exhibit 4, we
estimate that more than $2.6 billion of CMBS-related notes and properties were put up for
sale on Auction.com between mid-February and mid-June. Of these loans, about $915
million have since been reported as liquidated. The remainder may be reported as
liquidated in the future, once the sale closes, or may not have been sold.
In addition, we count at least another $951
million of CMBS as being offered for sale
on the Auction.com website in the coming
month. The largest of these are The Pier
at Caesars ($80.5 million and 10.5% of
MSC 2007-HQ13) and Astor Crowne
Plaza ($76 million and 2.6% of GSMS
2005-GG4).
Modifications can also serve to optically
depress some of the credit statistics. For
example, the Savoy loan that we
discussed in our July 2 CMBS Loans in the
News could return to the current bucket in
the coming months despite the loan’s
credit and performance still being impaired.
We believe that some of these factors will
truly slow the pace of new credit problems
(fewer maturities), while others are optical (modifications).
Away from the headline numbers, other tools (such as our CLIR measure) indicate to us
that while the pace of new credit problems have increased we have not seen a worrisome
acceleration in loan issues over the past several months.
CMBS retains good relative value
While there remain potential obstacles to further spread tightening, we believe the
positives outnumber the negatives for at least certain portions of the CMBS capital
stack, and look for them to perform well.
The current low interest rate environment (and the fact that this does not appear set to
change for a while) should continue to compel investors to put cash to work in the
relatively safer, higher-rated investment universe that offers reasonable spread,
including CMBS.
Specifically, in the legacy sector we still favor the wider-trading super-seniors, the
mid- and wider-name AMs, as well as select AJs. We also continue to believe there
is good value in the new issue CMBS market, as well as certain parts of the agency
CMBS universe.
Even though CMBS tightening has outpaced that of corporate debt, we still believe that it
can tighten further on a relative basis. In Exhibit 5 we show an update of super-senior
triple-A CMBS and corporate spreads, using the Credit Suisse LUCI1. As the exhibit shows,
CMBS outperformed corporates through the end of last year and most of the first quarter
before widening again. The differential (the shaded area) currently stands at around 23 bp,
compared to a recent narrow level of 5 bp at the start of April. Before the financial crisis,
CMBS historically traded tighter than the corporate benchmark, but for the past three
years that has not been the case. We believe the CMBS/corporate spread differential
could move back toward zero.
1 LUCI is Credit Suisse’s Liquid Corporate Bond Index. The sub-indices used here capture single-A corporate bonds.
Exhibit 4: Auction.com public listing
0.0
0.5
1.0
1.5
2.0Future auctions
as of June 15
Past
auctions*
$bn
* Covers the period from February 21 to June 15. Source: Credit Suisse, Auction,com, Trepp
12 July 2012
CMBS Market Watch Weekly 5
Exhibit 5: CMBS has more room to tighten to corporates
0
50
100
150
200
250
300
350
400
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct-
11
Nov-1
1
Dec-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-12
Ma
y-1
2
Jun
-12
CMBS-Corp basis
CMBS AAA
Corporate A
bp
Source: Credit Suisse
While we generally believe that the legacy super-seniors have value we would
currently favor the wider-trading names as we think further spread compression toward
the tighter names is warranted.
A similar thesis, with a slight twist, applies for most of the AM universe. In the AM
part of the capital stack we would be inclined to focus, for the time being, on the wider
2006 names as these have underperformed the tightening in some of the wider ’07 names.
While we still see good relative value in AMs, investors need to be cognizant that the beta
of these bonds has been higher than super-seniors, and will likely underperform in spread
widening scenarios.
We believe that there are several lower-priced legacy AJs that offer good long-term
value and will ultimately provide yields between 10% and the low-teens. However, as
we have long warned, we view a blanket recommendation on AJs as dangerous. Although
we are seeing increased investor interest in this part of the capital stack, we still believe
the buyer base is nowhere near as substantial as that of AMs and super-seniors.
Furthermore, we think buyers of the AJ space should have a longer-term horizon and
understand this sector has been far less liquid than that of more senior CMBS.
We also continue to favor the new issue market. At the super-senior level we realize
that investors may be unenthused about adding long duration, 10-year average life bonds
at such a low all-in yield. This, plus concerns about supply from a wave of upcoming deals,
has likely pressured spreads wider at the top of the capitals stack. Nevertheless, we
believe that the new issue super-seniors and AJ classes have good value, with potential to
tighten over the remainder of the year (absent a sell-off in other sectors).
We also believe there is the potential to see the new issue credit curve flatten as the
non-triple-As come in. The mezzanine part of the new issue market offers attractive
yields all the way down the capital stack.
On the synthetic side, we have generally found it more difficult to recommend trades due
to the technical nature of that market. That said, we currently find the CMBX.3 AJs as
relatively attractive versus the other series Ajs, as well as compared to CMBX.3 AMs.
In Exhibit 6, we show the price differential, for the past several years, of CMBX.3 AJs
compared to CMBX.4 AJs. The CMBX.3 index looks to be at the lower end of the long-
term range. One reason we believe the series 3 tranches underperformed over the past
few months was due to rising delinquencies on the cohort’s deals. Now that the bulk of
five-year maturities on these underlying loans have passed, we believe the increases in
series 3 delinquencies will start to moderate (although perhaps not end).
12 July 2012
CMBS Market Watch Weekly 6
In Exhibit 7, we also show the price difference between AMs and AJs across series 3. The
curve is at its steepest as AMs are at an all-time high versus AJs.
Exhibit 6: CMBX.3 AJ has cheapened to CMBX.4 AJ Exhibit 7: And CMBX.3 AJ looks cheap to AM 3s too
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
AJ.3 - AJ.4
0.0
5.0
10.0
15.0
20.0
25.0
Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12
AM.3-AJ.3
Source: Credit Suisse, Markit Source: Credit Suisse, Markit
To us this indicates that CMBX.3 AJs are cheap to CMBX.4 Ajs, as well as CMBX.3 AMs.
Real estate prices should remain close to flat in H2
At the start of the year we stated that “Given the outlook for a continued low-growth, low
interest rate environment, we expect commercial real estate prices to remain near
their current levels”. We believe that forecast is likely to stay accurate in the coming
months.
A low- or no-growth economy is unlikely to spur much of a pickup in either rental or
occupancy rates over the coming quarters, in our view. We also believe it unlikely that cap
rates will drop meaningfully over the near term. While others are forecasting a further
decline in cap rates because the 10-year Treasury rate is low, we do not buy into this logic.
Cap rates are unchanged to perhaps slightly lower over the first half of the year, but not
enough to drive any meaningful price appreciation and not enough to keep up with the
rally in Treasury rates, in our view.
When we look at cap rates we often compare them to the yield on corporate bonds
as a measure of the risk premium that real estate investors are demanding versus
other risky assets. This is slightly unusual as the more traditional way is to compare them
to Treasury rates (a risk free asset). Given the changes in the fiscal landscape, such as
quantitative easing and the Fed’s commitment to keep Treasury rates low, we believe the
comparison to government rates can, at times, be misleading. In Exhibit 8, we show cap
rates, over a long-term horizon, versus triple-B corporate yields and in Exhibit 9, we show
the differential. From this perspective, cap rates look reasonably priced to us.
12 July 2012
CMBS Market Watch Weekly 7
Exhibit 8: Cap rates vs. triple-B corporate yields* Exhibit 9: Cap rate and Corp bond yield differential
4
6
8
10
12
14
16
18
Q1
197
6
Q1
197
9
Q1
198
2
Q1
198
5
Q1
198
8
Q1
199
1
Q1
199
4
Q1
199
7
Q1
200
0
Q1
200
3
Q1
200
6
Q1
200
9
Q1
201
2
ACLI cap rate
BBB Corp yield
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
-
1.0
2.0
3.0
Q1
197
6
Q1
197
9
Q1
198
2
Q1
198
5
Q1
198
8
Q1
199
1
Q1
199
4
Q1
199
7
Q1
200
0
Q1
200
3
Q1
200
6
Q1
200
9
Q1
201
2
* Our Q2 2012 Cap Rate is a preliminary estimate. Source: Credit Suisse, American Council of Life Insurers, Moody’s
Source: Credit Suisse, American Council of Life Insurers, Moody’s
A few months ago, Moody’s and Real Capital Analytics unveiled a revamped commercial
mortgage price index (we discussed the revamped index in a CMBS Market Watch Weekly
back in May).
The Moody’s index has only been released through the April time period, but
shows a notable stalling in commercial property prices over the past several
months on a national market level. During the recovery period between early 2010
and November 2011 the index was up over 25%. However, since November the index
has risen less than 0.5%.
Exhibit 10: Moody’s national & market level indices Exhibit 11: Moody’s property sector indices
85
105
125
145
165
185
205
225
De
c-0
0
Au
g-0
1
Ap
r-02
De
c-0
2
Aug-0
3
Ap
r-04
De
c-0
4
Au
g-0
5
Ap
r-06
De
c-0
6
Aug-0
7
Apr-
08
De
c-0
8
Au
g-0
9
Ap
r-10
De
c-1
0
Au
g-1
1
Apr-
12
National
Non-major markets
Major markets
85
105
125
145
165
185
205
225
Dec-0
0
Au
g-0
1
Ap
r-02
De
c-0
2
Au
g-0
3
Ap
r-04
De
c-0
4
Au
g-0
5
Ap
r-06
Dec-0
6
Au
g-0
7
Ap
r-08
De
c-0
8
Au
g-0
9
Ap
r-10
De
c-1
0
Au
g-1
1
Ap
r-12
Retail
Industrial
Office - CBD
Office - Suburban
Apartment
Source: Moody’s, Credit Suisse Source: Moody’s, Credit Suisse
While the broad market index has flattened out (which we see in Exhibit 10), we see that
performance is not uniform across location and property types. In Exhibit 11, we show that
apartments, which had been one of the biggest gainers, were off the most in the latest
read. Suburban office, has struggled since reaching the bottom while CBD office has far
outpaced most other sectors.
12 July 2012
CMBS Market Watch Weekly 8
Back on Exhibit 10, we show property performance of the “Major Markets”2 compared to
the rest of the country. The major markets saw a rapid price appreciation off their local
lows in January 2010. While the non-major markets recovery was slower to start, they
were the better performers in the second half of 2011.
A first look at CRE fundamentals in Q2 2012
As noted above, the price performance of the various sectors of the commercial real
estate market have performed unevenly as of late as each sector has not only different
dynamics but also varying lags to the economic cycle. We find the same thing when we
look at fundamentals.
For example, the multifamily and hotel sectors continue to post strong increases in both
occupancy rates and rent growth as both have a reasonably short lag to changes in the
economic climate. In contrast, the pace of recovery for the office and retail sectors is quite
slow as occupancy and rental rates have only improved slightly, reflecting the slow US
economic growth environment.
One of the factors we thought would be a big positive for commercial real estate’s
recovery was the lack of new construction, which has kept overall supply low. The
reduction in new space coming on line has been a universal positive, so far, across all
property types.
We review, in the next few sections, the trends across the major property types based on
the preliminary 2012 Q2 data released by REIS, CoStar and Smith Travel Research.
Multifamily
Coming out of the recent real estate downturn, the multifamily property sector staged the
quickest recovery, with vacancies declining and rents increasing materially and
consistently since early 2010.
According to preliminary REIS data, the trend continued over the second quarter of 2012
as the vacancy rate declined by another 20 bp over the quarter to 4.7%. This is the lowest
read in more than 10 years, matching the record low observed in Q4 2001. Effective rents
also increased by a solid 1.3% on the quarter, the greatest since Q3 2007, and now stand
at an average of $1,032 per unit (see Exhibits 12 and 13)
Exhibit 12: Multifamily vacancies dropped by 20bp to 4.7% ...
Exhibit 13: … and effective rents increased by 1.3% in the second quarter of 2012
2%
3%
4%
5%
6%
7%
8%
9%
$900
$920
$940
$960
$980
$1,000
$1,020
$1,040
200
7 Q
1
200
8 Q
1
200
9 Q
1
201
0 Q
1
201
1 Q
1
201
2 Q
1
Va
c R
ate
Eff
ective
Re
nts
MF Rent $ MF Vacancies
2%
3%
4%
5%
6%
7%
8%
9%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
200
7 Q
1
200
7 Q
3
200
8 Q
1
200
8 Q
3
200
9 Q
1
200
9 Q
3
201
0 Q
1
201
0 Q
3
201
1 Q
1
201
1 Q
3
201
2 Q
1
Va
c R
ate
Ch
g in
Re
nts
QoQ Rent Change MF Vacancies
Source: Credit Suisse, REIS Source: Credit Suisse, REIS
2 Boston, Chicago, Los Angeles, New York, San Francisco and Washington DC
12 July 2012
CMBS Market Watch Weekly 9
New completions remained low, with approximately 9,500 units coming on line during the
second quarter (7,300 units were delivered in Q1 2012).
That said, REIS reports that the supply dynamic is likely to change and expects 70,000
units to be delivered in 2012, with another 150,000 to 200,000 units coming the following
year. By way of comparison, deliveries totaled roughly 37,000 units in 2011.
Multifamily markets have been the beneficiary of the ongoing weakness in the single-
family housing market. In addition to the increased difficulty in getting a residential
mortgage, uncertainty about economic growth and housing prices still lead many to favor
renting over buying. Exhibit 14 shows that homeownership continues to decline, which
bodes well for multifamily sector.
Exhibit 14: Multifamily vacancy rates and homeownership
2%
3%
4%
5%
6%
7%
8%
9%
63%
64%
65%
66%
67%
68%
69%
70%
200
7 Q
1
200
7 Q
2
200
7 Q
3
200
7 Q
4
200
8 Q
1
200
8 Q
2
200
8 Q
3
200
8 Q
4
200
9 Q
1
200
9 Q
2
200
9 Q
3
200
9 Q
4
201
0 Q
1
201
0 Q
2
201
0 Q
3
201
0 Q
4
201
1 Q
1
201
1 Q
2
201
1 Q
3
201
1 Q
4
201
2 Q
1
201
2 Q
2
Homeownership Rate (LHS) Multifamily Vacancy Rate (RHS)
Source: Credit Suisse, REIS, the BLOOMBERG PROFESSIONAL™ service
Hotel
Key performance indicators for the lodging industry show that fundamentals in this sector
have also improved. Occupancy rates, average daily rates (ADR) and revenue per
available room (RevPAR) metrics have grown consistently month-over-month (adjusting
for seasonality) since early 2010 (Exhibits 15 and 16). The latest monthly numbers from
Smith Travel Research show that occupancies were up between 3% and 5% across the
various hotel segments while RevPAR increased between 8% and 10%.
Exhibit 15: Hotel occupancy continues to improve Exhibit 16: RevPARs are also trending higher
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
Jul
Au
g
Se
p
Oct
Nov
Dec
2010 2011 2012
$30
$35
$40
$45
$50
$55
$60
$65
$70
$75
$80
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
Jul
Au
g
Se
p
Oct
No
v
De
c2010 2011 2012
Source: Credit Suisse, STR Source: Credit Suisse, STR
12 July 2012
CMBS Market Watch Weekly 10
The improved fundamentals have started to carry over to CMBS performances in general.
The 60+day rate for hotels peaked at 16.7% in January 2011 and declined thereafter,
reaching 11.9% in March, but increased to 13.8% by the end of Q2 2012. However, the
recent pick-up is largely due to a maturing large hotel loan being reported as delinquent:
ING Hospitality Pool, $568 million with exposure in WBCMT 2007-C32 and WBCMT 2007-
C33, contributes 1.3% to the 13.8% hotel delinquency total. Per the servicer’s comments,
the loan is expected to payoff successfully after a small maturity extension.
Office
The office market continued to show evidence of a very slow recovery. The national
vacancy rate remained unchanged at 17.2% in the second quarter. This marks a rather
gradual improvement from the cyclical high of 17.6% in the fourth quarter of 2010.
Vacancy rates remain near levels last experienced in the early 1990s.
Similarly, effective rents also increased slightly, rising by 0.3% to $22.73 in the second
quarter (Exhibit 17). These statistics bear out the thesis we laid out at the start of the year
that we expect to see a moderate improvement in vacancy rates and rental growth due to
increasing demand in a slow growth economy and a drop in construction activity.
While we believe that all property sectors are impacted by the health of the labor market,
the office market clearly has the closest and most direct ties. The payroll numbers shown
in Exhibit 18 reveal the extent of job losses during the height of the recession, as well as
the lackluster increases even as job growth resumed. Unless employment prospects
meaningfully change in upcoming quarters, office vacancies are likely to stay at 16%-17%
levels, in our view.
Exhibit 17: Office rents continued to increase at a slow pace, vacancies inched down
Exhibit 18: More job growth is needed for office vacancies to return to pre-crisis levels
8%
10%
12%
14%
16%
18%
20%
$20
$21
$22
$23
$24
$25
$26
200
7 Q
2
200
8 Q
2
200
9 Q
2
201
0 Q
2
201
1 Q
2
201
2 Q
2
Office Rent $ Office Vacancies
4%
6%
8%
10%
12%
14%
16%
18%
20%
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
200
0 Q
2
200
2 Q
2
200
4 Q
2
200
6 Q
2
200
8 Q
2
201
0 Q
2
201
2 Q
2
Chg in Payrolls (x000)
Office Vacancies
Source: Credit Suisse, REIS Source: Credit Suisse, REIS, BLS
Lack of new supply played an important role in this cycle and served to support the office
sector. New building deliveries reached a record low in 2011 of just 35 million square feet.
This compares to an annual average of 160 million square feet over the past 30 years.
Based on the estimates of buildings under construction, 2012 office deliveries will be up
slightly but also relatively low at approximately 45 million square feet (Exhibit 19).
12 July 2012
CMBS Market Watch Weekly 11
Exhibit 19: Historical Office Deliveries
164 164
116
5435 45
22
0
50
100
150
200
250
300
350
198
3
198
4
198
5
198
6
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
2000
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
(Million SF)
Estimated future deliveries (2012 and 2013) are based on buildings currently under construction. Source: Credit Suisse, CoStar.
Retail
Retail has lagged the recovery of the other property sectors making it the worst performer
since the end of the recession. However, over the past three quarters there have been
tentative signs that the worst for the sector may be over and the sector may be stabilizing.
The vacancy rate for neighborhood and community shopping centers had back-to-back
declines, falling another 10 bp to 10.8% in the latest quarter. Rents increased for the third
straight quarter, up 0.2%, to a national average of $16.55 (Exhibit 20).
Recently, the new supply of retail space has been constrained, which should be helpful for
the future recovery. While this is similar to the office sector, community shopping centers
did not have the same reduction of new supply heading into the recession. This, in all
likelihood, contributed to the slower recovery relative to the other sectors (Exhibit 21).
Statistics detailing the performance of regional malls follow a similar trajectory, with
vacancies declining for the third time in a row (down 10 bp to 8.9%) and rents increasing
by 0.3%, up for the fifth consecutive quarter.
While the improvement in this quarter is encouraging we still have concerns for the retail
market. In addition to slow job growth (which also affects consumer spending), we have
seen a continued stream of retailers evaluate their space needs as weak sales have cut
demand for space and online competition grows. Store closings by large retail chains such
as Sears/K-Mart and Best Buy continue and could result in a slower than typical recovery.
Exhibit 20: Neighborhood and Community Shopping Centers Vacancies and Rents
Exhibit 21: New supply is largely restrained for shopping centers
7%
8%
9%
10%
11%
12%
$14
$15
$16
$17
$18
$19
200
7 Q
1
200
8 Q
1
200
9 Q
1
201
0 Q
1
201
1 Q
1
201
2 Q
1
Retail Rent $ Retail Vacancies
0
10
20
30
40
50
60
70
80
90
2006 2007 2008 2009 2010 2011 2012H1
(Million SF)
Source: Credit Suisse, REIS Source: Credit Suisse, CoStar
12 July 2012
CMBS Market Watch Weekly 12
CMBS loans in the news
Skyline Portfolio gets “another” appraisal
BACM 2007-1, GECMC 2007-C1, JPMCC 2007-LDPX
We recently wrote that Vornado had leased out some space in Skyline 7 (one of the eight
buildings backing the Skyline portfolio loan) that was left vacant as the result of the US
government’s 2005 Base Realignment and Closure (BRAC) plan.
The just released July remittance report for GECMC 2007-C1, one of the three deals with
exposure to this loan, reported a new appraisal for the portfolio. The new appraised value
came in at $296.6 million ($115.6 per square feet) and was dated July 2012. This would
represent a 66% reduction from the appraised value of $872.0 million ($339.7 per square
feet) as at January 2007.
We are currently trying to confirm that this appraisal is indeed accurate and not a
mistake as remittance reports on the same deal reported an erroneous appraisal in April
this year. As of now, only one of the three deals with exposure has reported for July.
As per the servicer’s comment, the loan was given a short three-month forbearance,
starting from June and ending in September, with automatic extension up to
December 2012. The comments also mentioned that a loan modification is being pursued.
We think that an A-/B-note split type of modification is likely.
The loan currently has not incurred any interest shortfall and no appraisal reduction
amount (ARA) was reported. As the leases roll and vacancy increases, we will probably
see some interest shortfall assuming the appraisal is indeed that low. The exact level and
timing of the shortfall is difficult to estimate at this point given the lack of transparency in
terms of rent rolls. The most recent DSCR, as of yearend 2011, came in at 1.36x.
To recap, the portfolio consists of eight
suburban office properties located in Falls
Church, VA, close to downtown
Washington, DC, and totals 2.6 million
square feet. The buildings’ performance
has come under distress and currently has
a 26% vacancy rate that is expected to
increase as leases roll, according to a
filing by VNO earlier this year.
Approximately 811k square feet of space
will be impacted by 2015. We show the exposure to the property across the three
transactions in Exhibit 22.
450 Lexington to be bought by mezz lender
CSMC 2007-C5, CSMC 2008-C1
The Wall Street Journal reported that RXR Realty has agreed to buy 450 Lexington
Avenue, which it negotiated through its position as the holder of mezzanine debt on the
property. While the exact price could not be determined, the 910K square feet office
building located in Manhattan, which is fully occupied, is reportedly valued above
$600 million, the price paid by the current owner, Istithmar, and the total debt
encumbering the property.
The senior loan, totaling $310 million, was split into two pari-passu notes and securitized
in CMBS. The larger $200 million note was pooled in CSMC 2007-C5, representing 8.1%
of the deal and the smaller $110 million note was pooled in CSMC 2008-C1, representing
13.0% of the deal. As mentioned, there also exists a $190 million mezzanine debt.
Exhibit 22: Skyline exposure in CMBS
Deal Current
bal ($mn) Deal (%)
Highest class with shortfall (orig ratings)
BACM 2007-1 271.2 9.64 D (AA-)
GECMC 2007-C1 203.4 6.56 AJ (AAA)
JPMCC 2007-LDPX 203.4 4.36 F (BBB+)
Total 678.0
Source: Credit Suisse, Trustee report
12 July 2012
CMBS Market Watch Weekly 13
The loan is set to mature this month and the servicer’s watchlist comment mentioned
that there might be a short three-month extension granted. With the valuation above the
total debt amount we believe that it is likely that the loan will pay off in the coming
months. The loan is currently performing.
Possible restructuring of the Nestle 94 Pool
WBCMT 2007-C34
CapLease, Inc released a statement on July 10, 2012, that “it had repurchased the junior
first mortgage note” on the three industrial properties backing the Nestle 94 Pool loan
($106 million balance representing 7.3% of WBCMT 2007-C34). At securitization, in
addition to the securitized note, the property’s financing included a senior A-2 note (with a
balance of $11 million), a junior A-note (with a balance of $3.8 million) and a B-note (with a
balance of $24.7 million) all held outside the trust and all subordinated to the securitized
loan. Based on the balance mentioned in the statement, it appears that the senior A-2 note
was what was repurchased by CapLease.
The statement also mentioned that discussions with the special servicer to restructure the
loan are on-going. The loan is scheduled to mature in August 2012 and was transferred to
the special servicer in May 2012 due to an imminent maturity default. The loan, however,
is still performing and has not been delinquent.
The three underlying properties in the pool are all leased to a single tenant, Nestle Food
Company, although two of them are subleased to Del Monte Corp and General Mills. The
leases on all three properties are set to expire in December 2012. According to the most
recent servicer’s comments, Nestle has renewed the lease in one property for another five
years and Del Monte Corp has signed a five-year lease in the property that it is currently
subleasing. As for the third, Nestle had declined to renew its lease. The servicer
comments also mentioned that without a new tenant in the third property, occupancy will
drop to 70%.
One additional potential hurdle the borrower faces is the upcoming expiration of the
leasehold agreement in January 2013. At expiration, the borrower has the option to either
buy the land at fair market value or pay the rent due under the ground lease ($1.12 million
for all three properties).
We think that a likely modification for this loan would be an extension and perhaps a
temporary relief on the payment rate. The debt service coverage ratio (DSCR) as of year-
end 2011 came in at 1.9x, and even with a 30% vacancy we do not expect the DSCR to
drop below 1.0x.
Bank of America Plaza to be sold out of receivership
CGCMT 2006-C4
The Bank of America Plaza loan appears to be moving closer to liquidation after
Transwestern disclosed in a press release that it was named exclusive sale agent for the
building. The 303,064 square foot office building is located in the central business district
of Columbia, South Carolina, with Bank of America occupying 21% of the space. The
building’s vacancy currently stands at 30% according to the press release.
The $33.5 million loan is securitized in CGCMT 2006-C4 and accounts for 1.6% of the
deal. It was transferred to special servicing in March 2011 due to monetary default and a
receiver was put in place in August.
12 July 2012
CMBS Market Watch Weekly 14
2100 Ross foreclosure cancelled
WBCMT 2007-C34
The Dallas Business Journal has reported that the July 3 foreclosure auction for 2100
Ross has been cancelled. The foreclosure listing firm was quoted saying that the move
was not unusual for such a large asset and that it could be reposted for foreclosure at a
later date. We had previously announced the foreclosure auction on June 15.
The Dallas office building is currently owned by the Moinian Group and backs a $61 million
loan in WBCMT 2007-C34 (4.2% of the deal). The loan was transferred to special
servicing in July 2011 and missed its balloon maturity date this past May. The servicing
notes indicate that modification discussions are ongoing. The property was last appraised
for just under $60 million in February.
Tower at Erieview liquidated with 46.6% loss
BSCMS 2006-PW12
We wrote recently that the loan backed by Tower at Erieview had been sold at a discount,
but the purchase price was not revealed. The July remittance report released today
revealed that the loan had taken a loss of 46.6%. The net proceeds received on liquidation
was $25.7 million, but after repaying cumulative ASERs as well as servicers advances and
other fees and expenses, the final proceeds were reduced to $22.6 million.
The loss from this loan (coupled with three other loans with small losses) wrote down the
remainder of Class J (originally rated BB+) and 65% of Class H (originally rated BBB-).
Exhibit 23: Notable large loan payoffs & liquidations in July
Deal CMBX Loan
Maturity Bal
($mn) Prop type City State Loss
(%)* Defeased
BACM 2007-1** 3 Pacific Shores Jan-12 92.7 Office Redwood City CA 1.8 No
GECMC 2007-C1 92.7 1.8
BACM 2007-2 4 Howard Crossing Jan-13 153.0 Multifamily Ellicott City MD 0 No
BSCMS 2006-PW12 2 Tower at Erieview Apr-16 42.4 Office Cleveland OH 46.6 No
COMM 2003-LB1A Chandler Fashion Center Nov-12 45.2 Retail Chandler AZ 0 No
GMACC 2003-C1 47.0 0
GMACC 2003-C1 Oakbrook Center Oct-12 49.6 Retail Oak Brook IL 0 No
* Losses less than 3% are considered low-loss. ** July remittance for BACM 2007-1 not reported yet. The loss is inferred from the pari-passu note reported in GECMC 2007-C1. Source: Credit Suisse, Trustee reports
12 July 2012
CMBS Market Watch Weekly 15
Technical update
Exhibit 24: US CMBS pipeline
Deal type Rate type Size ($ million)
Deals in July, 2012
Morgan Stanley, Bank of America - MSBAM 2012-C5 (Deal is in the market) Conduit/Fusion Fixed 1,353
Wells Fargo, RBS Conduit/Fusion Fixed 1,000
General Growth - Grand Canal Shoppes Single Borrower Fixed 650
IDB Group - 452 Fifth Avenue Single Borrower Fixed 450
HSBC Tower - JPMCC 2012-HSBC (Deal is in the market) Single Borrower Fixed 300
Deals in August, 2012
UBS, Barclays, Archetype Conduit/Fusion Fixed 1,100
Deals in September/October 2012
Goldman Sachs, Citigroup, Natixis Conduit/Fusion Fixed 1,200
Deutsche Bank, Cantor Fitzgerald Conduit/Fusion Fixed 1,000
Goldman Sachs, Jefferies LoanCore, Archetype Conduit/Fusion Fixed 1,000
J.P. Morgan Conduit/Fusion Fixed 1,000
J.P. Morgan (Floater) Floater Floating 1,000
Morgan Stanley, Bank of America Conduit/Fusion Fixed 1,000
Wells Fargo, RBS Conduit/Fusion Fixed 1,000
Deutsche Bank (Floater) Floater Floating 800
Announced Total 12,853
Source: Credit Suisse, Commercial Mortgage Alert
Exhibit 25: 2012 CMBS issuance in millions
Month
Multi-
Borrower Floating Rate
Single
Borrower Other
2012 US
Total
2012 Non-US
Total*
2012 Global
Total
US Agency
CMBS
US Resecur. /
CDO
January $1,154 $0 $0 $0 $1,154 $701 $1,856 $4,088 $0
February $0 $0 $625 $0 $625 $334 $959 $6,159 $0
March $2,965 $0 $450 $0 $3,415 $0 $3,415 $4,099 $0
April $2,465 $0 $412 $132 $3,009 $826 $3,835 $5,061 $0
May $2,556 $0 $1,670 $160 $4,386 $0 $4,386 $5,380 $35
June $3,608 $0 $415 $0 $4,023 $125 $4,148 $3,728 $0
July $0 $0 $0 $0 $0 $0 $0 $422 $0
Total $11,532 $0 $3,572 $292 $15,396 $1,986 $17,382 $28,515 $35
*Does not include international deals created for central-bank exchanges. Source: Credit Suisse, Commercial Mortgage Alert, IFR
12 July 2012
CMBS Market Watch Weekly 16
Relative Value Monitor
Exhibit 26: 10-year sector – CMBS, REIT, and corporate spreads
100
120
140
160
180
200
220
240
260
280
Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12
Sp
rea
ds to
US
T
CMBS AAA
REIT BBB Index
Corporate A
Source: Credit Suisse
Exhibit 27: 5-year sector Exhibit 28: 10-year sector
Δ bps 3-month
7/10/12 7/3/12 High Low Average
UST Yield 0.62 -8 0.89 0.62 0.75
Swap 25 -0 38 25 30
AAA CMBS 285 -0 305 285 291
Agency 14 -0 23 14 17
LUCI Single-A 125 -1 149 108 126
Δ bps 3-month
7/10/12 7/3/12 High Low Average
UST Yield 1.51 -12.00 2.05 1.46 1.75
Swap 14 -1 22 10 14
AAA CMBS 214 -1 26 208 230
FNMA DUS 87 -1 97 74 84
Agency 23 0 32 22 27
LUCI Single-A 168 1 192 156 172
Note: Liquid U.S. Corporate Index is an investment-grade, corporate bond index consisting of ~800 liquid, US dollar-denominated issues, priced daily and rebalanced monthly by Credit Suisse. Source: Credit Suisse
Note: Liquid U.S. Corporate Index is an investment-grade, corporate bond index consisting of ~800 liquid, US dollar-denominated issues, priced daily and rebalanced monthly by Credit Suisse. FNMA DUS spreads over swaps are for corporate settle par priced pools. Source: Credit Suisse
12 July 2012
CMBS Market Watch Weekly 17
Exhibit 29: CMBX prices as at July 10, 2012
CMBX 5 (CMBX 2008-1) AAA AM AJ AA A BBB BBB- BB
Current Price 92.50 79.94 61.81 43.23 26.98 18.08 14.29 5.00
Change vs. Prior Week 0.00 -0.21 0.10 0.00 -0.17 -0.13 0.00 0.00
Minimum (18 mo.) 85.52 68.61 51.61 35.59 26.39 16.93 13.32 5.00
Maximum (18 mo.) 97.66 93.59 89.11 79.57 62.58 28.13 21.88 5.00
Average (18 mo.) 92.34 81.60 67.47 52.32 39.15 20.85 16.43 5.00
Standard Deviation 2.82 6.43 10.50 12.37 11.34 3.78 2.87 0.00
# of Std. Dev. 0.06 -0.26 -0.54 -0.73 -1.07 -0.73 -0.75 0.00
CMBX 4 (CMBX 2007-2) AAA AM AJ AA A BBB BBB- BB
Current Price 91.48 79.79 60.50 34.78 23.74 17.82 14.27 5.00
Change vs. Prior Week 0.00 -0.43 0.04 0.26 -0.05 -0.21 0.02 0.00
Minimum (18 mo.) 85.05 65.71 46.66 30.89 23.51 16.88 13.43 4.99
Maximum (18 mo.) 97.73 93.53 84.79 68.75 54.25 28.00 21.88 5.00
Average (18 mo.) 91.98 80.80 64.84 45.72 34.64 20.74 16.46 5.00
Standard Deviation 3.05 6.90 10.26 11.34 8.80 3.75 2.83 0.00
# of Std. Dev. -0.16 -0.15 -0.42 -0.96 -1.24 -0.78 -0.77 0.05
CMBX 3 (CMBX 2007-1) AAA AM AJ AA A BBB BBB- BB
Current Price 92.46 83.00 61.90 33.19 18.82 9.36 7.68 5.00
Change vs. Prior Week -0.08 -0.40 0.00 -0.19 -0.05 -0.06 0.00 0.00
Minimum (18 mo.) 85.30 70.77 51.39 29.85 18.57 9.30 7.68 4.94
Maximum (18 mo.) 97.11 94.87 90.06 74.14 58.13 23.83 19.07 5.00
Average (18 mo.) 92.18 83.45 69.28 45.94 32.45 14.01 11.86 4.99
Standard Deviation 2.72 5.99 11.29 13.03 10.54 4.53 3.72 0.01
# of Std. Dev. 0.10 -0.07 -0.65 -0.98 -1.29 -1.03 -1.12 0.39
CMBX 2 (CMBX 2006-2) AAA AM AJ AA A BBB BBB- BB
Current Price 94.71 87.25 74.94 56.04 37.88 14.39 10.43 5.00
Change vs. Prior Week -0.14 -0.15 -0.31 -0.27 -0.43 -0.08 -0.06 0.00
Minimum (18 mo.) 88.96 75.25 63.42 45.71 36.11 13.79 9.86 5.00
Maximum (18 mo.) 98.04 96.15 94.84 85.08 74.66 37.79 24.29 5.04
Average (18 mo.) 94.20 87.18 79.09 63.05 49.54 20.22 14.10 5.00
Standard Deviation 1.87 4.95 7.93 10.66 11.36 7.06 4.28 0.00
# of Std. Dev. 0.27 0.01 -0.52 -0.66 -1.03 -0.83 -0.86 -0.06
CMBX 1 (CMBX 2006-1) AAA AM AJ AA A BBB BBB-
Current Price 96.23 91.77 85.25 70.58 56.00 33.54 17.38
Change vs. Prior Week -0.18 -0.31 0.04 0.48 -0.42 0.80 0.13
Minimum (18 mo.) 92.09 82.48 73.25 58.63 46.66 25.07 13.36
Maximum (18 mo.) 98.42 97.60 95.17 90.64 84.93 58.75 37.00
Average (18 mo.) 95.86 91.20 85.42 73.85 62.95 38.20 21.77
Standard Deviation 1.30 3.60 5.31 8.32 10.23 9.19 6.71
# of Std. Dev. 0.29 0.16 -0.03 -0.39 -0.68 -0.51 -0.65
Source: Credit Suisse, Markit
12 July 2012
CMBS Market Watch Weekly 18
Exhibit 30: CMBS historical spreads
CMBS Spreads - Change on the Year
SPREAD TO SWAPS 5AAA 10AAA 10AA 10A 10BBB 10BBB-
7/10/2012 260 200 N/A N/A na na
12/30/2011 310 250 2795 3030 na na
Change (50) (50) N/A N/A na na
SPREAD TO UST 5AAA 10AAA 10AA 10A 10BBB 10BBB-
7/10/2012 285 214 na na
12/30/2011 350 267 2812 3047 na na
Change (65) (53) N/A N/A na na
SWAP SPREADS 5y r Sw ap 10y r Sw ap
7/10/2012 25 14
12/30/2011 40 17
Change (15) (3)
CMBS Spread to Swaps History
5AAA 10AAA 10AA 10A 10BBB 10BBB-
YTD Average 278 210 2561 2997 na na
Range 260 - 310 180 - 245 2330 - 2755 2670 - 3315 na na
2011 Average 299 268 2052 3087 na na
Range 225-350 155-355 1260-2790 2145-4180 na na
2010 Average 274 302 3341 4380 na na
Range 235-310 215-415 2710-3500 3450-4900 na na
2009 Average 736 634 4029 5729 na na
Range 350-1450 300-1200 3000-5500 3900-8100 na na
2008 Average 466 365 1362 1807 2747 3202
Range 125-1500 82-1400 275-5500 400-6500 825-9000 950-9700
2007 Average 49 44 101 142 315 386
Range 16-125 21-105 33-260 42-380 65-900 85-1000
2006 Average 17 26 38 47 87 122
Range 14 - 22 22 - 32 32 - 51 40 - 61 75 - 120 85 - 175
2005 Average 19 28 41 51 103 151
Range 16 - 25 22 - 34 28 - 49 36 - 59 80 - 122 125 - 175
2004 Average 28 30 37 45 84 126
Range 24 - 33 26 - 35 32 - 43 40 - 54 75 - 95 115 - 135
2003 Average 36 37 47 56 111 162
Range 28 - 45 29 - 47 36 - 61 44 - 77 85 - 140 130 - 185
2002 Average 44 47 59 73 121 155
Range 38 - 51 42 - 54 52 - 74 62 - 95 105 - 150 135 - 186
2001 Average 46 52 69 87 141 185
Range 35 - 60 45 - 64 59 - 84 74 - 105 125 - 170 164 - 215
2000 Average 25 36 53 70 119 165
Range 22 - 35 31 - 45 47 - 63 62 - 84 102 - 143 138 - 217
1999 Average 35 42 61 82 144 232
Range 19 - 51 35 - 54 51 - 79 66 - 109 105 - 199 185 - 298
1998 Average 32 41 57 77 125 174
Range 11-95 21-105 35-125 50-160 82-245 106-321 Source: Credit Suisse
GLOBAL SECURITIZED PRODUCTS RESEARCH
Roger Lehman, Managing Director
Global Head of Securitized Products Research
+1 212 325 2123
Eric Miller, Managing Director
Global Head of Fixed Income and Economic Research
+1 212 538 6480
RESIDENTIAL MORTGAGES CONSUMER ABS
Mahesh Swaminathan, Managing Director Chandrajit Bhattacharya, Director
Group Head Group Head
+1 212 325 8789 +1 212 325 1546
[email protected] [email protected]
AGENCY MBS NON-AGENCY MBS Marc Firestein, Analyst
Mahesh Swaminathan, Managing Director Chandrajit Bhattacharya, Director +1 212 325 4379
Group Head Group Head [email protected]
+1 212 325 8789 +1 212 325 1546
[email protected] [email protected] CDO / CLO
Qumber Hassan, Director Marc Firestein, Analyst David Yan, Director
+1 212 538 4988 +1 212 325 4379 Senior Strategist
[email protected] [email protected] +1 212 325 5792
Vikram Rao, Vice President
+1 212 325 0709
CMBS
Roger Lehman, Managing Director Serif Ustun, Vice President, CFA Sylvain Jousseaume, Vice President Tee Chew, Associate
Group Head +1 212 538 4582 +1 212 325 1356 +1 212 325 8703
+1 212 325 2123 [email protected] [email protected] [email protected]
MODELING AND ANALYTICS
David Zhang, Managing Director
Group Head
+1 212 325 2783
Taek Choi, Vice President
+1 212 538 0525
Oleg Koriachkin, Vice President
+1 212 325 0578
Tony Tang, Vice President
+1 212 325 2804
Yihai Yu, Vice President
+1 212 325 1143
Joy Zhang, Vice President
+1 212 325 5702
Jack Yu, Vice President
+1 212 538 5597
LOCUS ANALYTICS
Brian Bailey, Director
Locus Analytics Specialist
+1 212 325 0182
Shana Bornstein, Associate
Locus Analytics Specialist
+1 212 325 1083
LONDON JAPAN
Carlos Diaz, Vice President
+ 44 20 7888 2414
Tomohiro Miyasaka, Director
Japan Head
+ 81 3 4550 7171
Disclosure Appendix
Analyst Certification Roger Lehman, Serif Ustun, Sylvain Jousseaume and Tee Chew each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Important Disclosures Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions. Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and-analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en. Credit Suisse clients with access to the Locus website may refer to http://www.credit-suisse.com/locus. For the history of recommendations provided by Technical Analysis, please visit the website at http://www.credit-suisse.com/techanalysis. Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.
Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view on the subject issue. Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is factual or a reasonable, non-material deduction based on an analysis of publicly available information.
Corporate Bond Risk Category Definitions In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively.
Credit Suisse Credit Rating Definitions Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet its financial commitments is very weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC – obligor's capacity to meet its financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinions do not necessarily correlate with those of the rating agencies.
Structured Securities, Derivatives, and Options Disclaimer Structured securities, derivatives, and options (including OTC derivatives and options) are complex instruments that are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation. OTC derivative transactions are not highly liquid investments; before entering into any such transaction you should ensure that you fully understand its potential risks and rewards and independently determine that it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such tax, accounting, legal or other advisors as you deem necessary to assist you in making these determinations. In discussions of OTC options and other strategies, the results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether OTC options or option-related products, as well as the products or strategies discussed herein, are suitable to their needs. CS does not offer tax or accounting advice or act as a financial advisor or fiduciary (unless it has agreed specifically in writing to do so). Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated options transactions. Use the following link to read the Options Clearing Corporation's disclosure document: http://www.theocc.com/publications/risks/riskstoc.pdf Transaction costs may be significant in option strategies calling for multiple purchases and sales of options, such as spreads and straddles. Commissions and transaction costs may be a factor in actual returns realized by the investor and should be taken into consideration.
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse AG operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates (“CS”) to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR’s, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS’s own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS’s website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority (“FSA”). This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. Recipients who are not market professional or institutional investor clients of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as “advice” within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm’s length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. Copyright © 2012 CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay purchase price only.