securitized credit: european abs tracker -...

Market Update

Central bank actions in Europe helped improve sentiment towards the close of last week. Our cross-asset strategists argue that cheap valuations and extreme bearishness create conditions for a tactical trough in October. For securitized products, we expect an improvement in risk appetite to benefit not just the core sectors and Granite, but also short-dated peripheral bonds and UK NC seniors. On the primary front, three deals emerged from under the radar last week, adding ~€2 billion in new issuance.

Thought for the Week

This week we scan the peripheral space for relative value opportunities, focusing on short-dated Spanish SME and consumer ABS bonds. Despite the state of affairs in the Spanish real estate markets, an investment case for short WAL SME CLOs can be made based on the following factors:

Securitized CreditEuropean ABS Tracker

M O R G A N S T A N L E Y R E S E A R C HEurope

Morgan Stanley & Co. International plc+

Srikanth [email protected] +44 (0)20 7677 2969

Morgan Stanley & Co. LLC

Vishwanath Tirupattur [email protected] +1 (1)212 761 1043

October 10, 2011

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

high credit enhancement, front-ended cashflows, limited exposure to tail risks (a break-up of the monetary union), and attractive yield pick-up over core ABS. We identify bonds with short maturity profiles and strong credit characteristics.

News Tracker

On the back of downgrading Italy’s sovereign rating last week, Moody’s commented that Italian structured finance transactions can still achieve a Aaa rating provided they have sufficient credit enhancement and “highly rated transaction parties or appropriate operational risk mitigants in place”. The agency will review all Italian transactions and announce any rating changes in the coming few weeks.

M O R G A N S T A N L E Y R E S E A R C H

2

European ABS TrackerOctober 10, 2011

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1 . Market Update

2 . Thought for the Week

3. News Tracker

4. Cross-Asset Comparison

5 . Spreads

6 . Issuance

7 . Redemptions and Net Issuance

8 . CMBS Loan Activity

9 . Rating Actions

Table of Contents


3


Market Update

Markets poised for a tactical rally • Central bank actions in Europe and better-than-expected payroll data helped improve sentiment towards the close of last week, after the gloomy

start on the back of uncertainties surrounding Greek and Dexia bailouts. The BoE’s resumption of QE with £75 billion of additional gilt purchases was clearly a positive catalyst for broader markets, although we note that for the UK mortgage market, it is not QE per se but the ability of the move to improve credit availability that is critical. The BoE’s asset purchases are scheduled to begin on October 10 and be completed over a four- month period. The ECB, for its part, stuck to its separation principle – keeping rates unchanged (in line with our economists’ view), while announcing additional unconventional measures to ease funding strains in the banking system. The reopening of the covered bond purchase programme bodes well for technicals in that market, but the implications for securitized products are limited, in our view. At the margin, Italian and peripheral RMBS may benefit from some sympathetic stabilization in spreads.

• In the ABS market, Granite mezz rallied the most on the back of last week’s developments: triple Bs were up ~2 points on the week while double As and single As were up ~1 point. Meanwhile, core sectors continued to hold firm across the capital structure, despite a material increase in bidlist volumes in UK prime RMBS. Last week’s lists also provided some interesting price points on some thinly traded sectors like Portuguese and Irish RMBS.

• Looking ahead, our cross-asset strategists argue that cheap valuations and extreme bearishness create conditions for a tactical trough in October. The weekend’s newsflow on bank recapitalisation and the relatively creditor-friendly terms of Dexia’s bailout support their constructive view. For securitized products, we expect an improvement in risk appetite to benefit not just the core sectors and Granite, but also short-dated peripheral bonds and UK NC seniors.

€2 billion in new issuance from predominantly preplaced transactions• Three Europeans deals emerged from under the radar last week – Arena 2011-2 (€775 million Dutch RMBS, €435 million placed) from Delta Lloyd,

Turquoise 2011-1 ($500 million UK card ABS) from HSBC and Gracechurch 2011-5 ($1 billion UK card ABS) from Barclays. The short marketing window clearly indicates significant pre/private placement; nonetheless, the price points on all three transactions reflect a remarkable resilience of these core ABS sectors. Last week’s issuance also included SMART 2011-3, an Australian auto ABS transaction that priced a £110 million tranche at 120bp. We maintain our view that continued access to securitisation (and covered bonds) markets in core jurisdictions is an important differentiating factor between 2008 and the present time.

• Nationwide’s Silverstone 2011-1 is expected to price this week and is reported to include only $ and £ tranches. The lender successfully tapped the covered bond market last week, pricing a €1.5 billion, 5-year covered bond at 130bp over swaps – a day before Moody’s downgraded it (along with 11 other UK banks). We do not expect the downgrade to have any significant impact on investor appetite for the new Silverstone deal.


4


Thought for the Week

Protracted middle game makes short-dated peripheral paper attractive• Gradual progress towards the sovereign end-game... Despite

heightened discussions on the potential ‘end-game’ to the crisis, our cross-asset strategists argue (see Cross-Asset Navigator, September 30, 2011) that it is difficult to envisage a scenario where policy-makers get there in the intermediate term (3-6 months). So, the focus has to be on intermediate initiatives, with the progress on EFSF expansion and bank recapitalization talks being steps in the preferred direction.

• …could mean opportunities in short-dated peripheral ABS: For investors who agree with this view on a protracted ‘middle-game’, we believe that short Spanish/Portuguese SME and consumer ABS offer some interesting opportunities. Despite the state of affairs in the real estate markets in Spain, we focus on the SME CLO market because the underlying assets are of relatively short maturity and because a number of transactions have deleveraged significantly. So, our investment case for short WAL bonds in this space is based on the following factors: High credit enhancement, front-ended cashflows, attractive yield pick-up over core ABS, and limited exposure to tail risks (a break-up of the monetary union).

• Screen 1: Absent reliable current WAL estimates, we put deals in these sectors through the following sieves: bond factors in the 10-20% range and expected maturities ~1.5 years or less, assuming no clean-up calls. The resultant subset of bonds is shown in the top-right chart.

• Screen 2: For investors comfortable with slightly higher duration, we present a second subset of bonds with factors in the 20-35% range that benefit from strong credit characteristics (bottom-right chart). We focus on the credit enhancement to 90+ ratio as the core credit metrics, but also present outstanding defaults (write-offs) and reserve fund levels for the reader’s reference. It is important to note that the default numbers are already adjusted for in the credit enhancement calculations, courtesy of the provisioning mechanisms.

Source: Morgan Stanley Research, Bloomberg, Rating agencies

Transaction Originator Collateral ClassBond

FactorEstimated

WALMaturity

EstimateFTBAM 1 Banca March ES SME 2CA/2SA 12% <1yr Late 2012DOURO 1 Banco BPI PT SME A 12% <1yr Late 2013AYTPY I Multiple ES SME F2/T2 13% ~1yr Late 2013SANCF 2007-1 Santander ES Auto A 19% <1yr Late 2013TDSAB Banco Sabadell ES SME 1CA/1SA 10% 1-1.5yr Late 2014BBVAC 2006-1 BBVA ES Consumer A 17% 1-1.5yr Late 2014BBVAP 5 BBVA ES SME A2 18% 1-1.5yr Late 2014RPYME 2 Multiple ES SME A1 15% ~1yr Mid 2014SANTM 2 Santander ES SME A2 16% 1-1.5yr Mid 2014BBVAA 2 BBVA ES Auto A 17% <1yr Mid 2014

1) Short-Dated SME/ABS Paper…

Source: Morgan Stanley Research, Bloomberg, Intex

Transaction Originator Collateral Class CE 90+

O/s Defaults

(% CB) RatingRF (% of

Target)SANFT 1 Santander ES SME B2 36.9% 0.9% 0.72% Aa1/AAA 100%CIBFT III Caja Madrid ES SME BCA/BSA 60.7% 1.6% 3.32% Aaa/A 100%

EMPOP 2006-1Banco Popular ES SME A2 38.2% 1.8% 10.23% Aaa/AAA/AA 80%

POPYM 2007-2Banco Popular ES SME A2 37.8% 2.1% 9.63% Aaa/-/AAA 72%

LTR 6 Multiple PT&ES Autos A 55.2% 4.4% 7.25% Baa1/AA- 100%SANTM 3 Santander ES SME A2 33.5% 3.0% 1.91% Aaa/A+/AAA 69%BANKP I Bankinter ES SME A2 23.8% 2.2% 3.24% Aaa/-/AAA 64%

BVAP 2007-1Banco Valencia ES SME A2 36.7% 4.0% 11.89% Aa3/A 0%

PNDES 2007-1Caixa Penedes ES SME A 24.9% 2.8% 0.98% A2/AA 100%

TDCAM 4 CAM ES SME A 25.1% 3.1% 5.08% Aa3/A/AAA 49%BBVAC 2006-2 BBVA ES Consumer A 18.1% 2.5% 16.53% Aa3/AA/AA+ 82%BBVAF 2007-1 BBVA ES Auto A 23.1% 3.4% 17.08% A2/-/A 0%

GCSAB 6Banco Sabadell ES SME A2 17.7% 3.8% 5.56% Aa1/-A+ 50%

BBVAL 2007-1 BBVA ES Leases A1/ A2 16.0% 5.7% 13.91% BB/Baa3 0%

2)…with Strong Credit Characteristics

https://secure.ms.com/fidweb/firLink/webapp/openFile.jsp?action=stream&filename=mtb73143.pdf


5


News Tracker

Government support mooted for UK SMEs: In a move to boost lending to small businesses, Chancellor George Osborne announced plans for a ‘credit easing’ scheme for SMEs early last week. Details of the plan are likely to emerge only in November. If the scheme includes a securitisation option (asset purchase or guarantees), it would lay the ground for new UK SME CLO issuance. Regardless of whether the government goes down this route or not, any improvement in the financing situation for SMEs bodes well for existing securitisations in the sector (see Securitized Credit: European ABS Tracker, September 5, 2011).

CLO manager consolidation trend continues as GSO Capital Partners acquires Harbourmaster Capital: After doubling its European CLO business by acquiring AIB Capital Market’s four CLOs earlier this year, GSO recently announced the acquisition of Harbourmaster Capital – a move that will make it one of the largest CLO managers in Europe. According to the press release, the combined European leveraged loan platform will have €11.5 billion of assets under management. GSO currently manages eight European leveraged loan CLOs and the acquisition with take its total count to 22. We expect consolidation activity to continue in European CLOs as new issue deal volume remains subdued.

UK house prices down marginally in September – Halifax: UK home prices fell 0.5%M and 2.3%Y in September according to figures released by Halifax. The decline follows August’s fall of 1.1% after three successive months of marginal rises. Halifax dubs this as a market where “prices are lacking genuine direction” and says that it expects little change over the remainder of the year.

Unemployment update – Spain and Ireland: Unemployment numbers released by the Spanish Ministry of Labour revealed a 2.32%M and 5.2%Y rise in jobless claims, taking the total unemployed to 4.2 million in September. This marks the highest monthly rise since January. Spain is struggling with an employment rate of 21% (Europe’s highest), and these numbers add to the growing concern around the country’s growth prospects. Staying in peripheral Europe, data from Ireland’s Central Statistics Office point to a slight decline in the Irish unemployment rate (14.3% in September versus 14.4% a month back). Unemployment in Ireland has hovered around 14% since the beginning of the year – a sign of stability but at elevated levels. As we noted last week, stable unemployment is at odds with the high rate of new delinquencies in Irish RMBS, raising concerns of “strategic defaults”.

Peripheral rating actions continue: Meanwhile, sovereign downgrades continued unabated last week, with Moody’s and Fitch downgrading Italy to A2 and A+, respectively. In the context of the downgrades, Moody’s noted that Italian structured finance transactions can still achieve a Aaa rating provided they have sufficient credit enhancement and “highly rated transaction parties or appropriate operational risk mitigants in place”. Accordingly, Moody’s will review all Italian SF deals and announce any rating changes in the coming few weeks. Meanwhile, in addition to downgrading the Spanish sovereign rating to AA-, Fitch also placed 33 Spanish ABS tranches on watch negative, citing lack of remedial actions to mitigate counterparty risk stemming from the downgrades of Banco Popular Espanol and Banco Sabadell.




6


Market Data


7


€ Bln

-100200300400500

EU ABS EU Financials EU Covered2006 2007 2008 2009 2010 YTD 2011

Cross-Asset Comparison

YTD Spread Change

Note: Positive Basis indicates RMBS trades wider than coveredSource: Markit iBoxx, Morgan Stanley Research

Source: Bloomberg, Morgan Stanley Research

Source: IFR, Dealogic, Morgan Stanley ResearchNote: ABS issuance includes only placed issuance

Source: Markit iBoxx, Morgan Stanley Research

Downgrade/Upgrade Ratio

Gross Issuance

RMBS vs. Covered Basis by Country

Year EU ABS EU Financials EU Non Financials2006 0.1 0.3 1.3

2007 0.1 0.5 1.1

2008 4.3 7.5 3.3

2009 21.1 2.3 4.8

2010 5.3 4.2 1.9

YTD 2011 2.1 5.8 1.5

Current Spread vs. 2011 Min/Max150

305

255

229

189

812

130

205

110

106

94

352

151

325

255

237

208

874

AAA UK Pr RMBS

EUR CLO

Senior Bank

AA Financials

iTraxx Main

iTraxx Xover

Current vs. 2011 Min/Max

866

6

131

-33

-121

-400

-300

-200

-100

0

100

200

300

400

UK NL IT ES PT IE


8


Spread Summary

AAA AA A BBB AAA AA A BBB

ABS

Autos 70 - 160 - (5) - 0 -

Cards 140 - 250 350 0 - 0 0

Prime RMBS

UK 150 250 310 425 0 5 0 0

NL 145 250 325 400 0 10 25 25

IT 300 475 675 900 25 50 50 75

Peripheral RMBS

ES 475 - - - 0 - - -

PT 800 - - - 50 - - -

IE 750 - - - 0 - - -

Non-Prime RMBS

UK BTL 350 - - - 0 - - -

UK NC 400 - - - - - - -

CMBS

German MF (Prices) 89 80 70 67 (2) (4) (3) 1

EU Conduit 725 - - - 25 - - -

UK 675 - - - 25 - - -

CLO

EU Lev. Loan 305 825 1200 - (20) 25 50 -

UK B/S 275 - - - 0 - - -

ES SME 650 - - - 0 - - -

Indicative Level 1 Week Change

Granite Price History

US AAA Price Levels - Current vs. Last Week


Source: Markit, Morgan Stanley Research

(3.0)

(2.0)

(1.0)

-

US CLO CMBXDuper

CMBX AM CMBX AJ ABX 06-2 ABX 07-1

Px Change

-20406080100

Px Level

Change Current Level RHS

NAT (Nov 2008)Bank RunNationalisation

0

20

40

60

80

100

Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11

GRANM AAA GRANM AA GRANM A GRANM BBB

Source: Markit, Morgan Stanley Research

Indicative Spread Levels


9


Spreads – RMBS

Current vs. 2 year Min/Max

155

575

250

200

650

325

70

204

115

76

101

144

226

575

611

205

650

350ES RMBS

PT RMBS

UK BTL

UK NC

CMBS

EUR CLO

0

200

400

600

800

1000

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11BBB-AAA Sub-Senior (Banks)

Cross Sector Basis (vs. Prime RMBS)

Senior-sub Basis – Prime RMBS vs. Banks (bp)


Note: AAA UK prime RMBS spreads are used as prime benchmark Source: Markit iBoxx, Morgan Stanley Research

0

100

200

300

400

500

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11

UK Prime RMBS Senior Bank AA Financials UK Covered


UK Prime vs. Financials (bp)

0

250

500

750

1000

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11

Granite AAA Prime UK NCSource: Markit iBoxx, Morgan Stanley Research

Granite vs. Prime and NC (bp)


10


Spreads – RMBS (Cont.)

-200

0

200

400

600


IT RMBS AAA IT Covered IT Sov. (ASW)

-200

0

200

400

600

800


ES RMBS AAA ES Covered ES Sov. (ASW)

-200

100

400

700

1000

1300

1600


PT RMBS AAA PT Covered PT Sov. (ASW)

Italian RMBS (bp)

Source: Markit iBoxx, Morgan Stanley Research Source: Markit iBoxx, Morgan Stanley Research


Portuguese RMBS (bp)Spanish RMBS (bp)

0

300

600

900

1200

1500


UK NC AAA UK BTL AAA Bank Subs

Non-Prime RMBS (bp)



11


Spreads – Consumer & Corporate ABS

0200400600800

100012001400

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11EU CMBS AAA EU REIT 5 yr CDS US CMBS AAA

0

200

400

600

800

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11EU LL CLO AAA US LL CLO AAA AA € Corporates

Credit Card ABS (bp)

CLO (bp)

Auto ABS (bp)

CMBS (bp)



0

200

400

600

800


UK Cards AAA US Cards AAA

0

200

400

600

800


DE Auto AAA US Autos AAA IBoxx Autos Parts (1-3 yr)


12


Cumulative Issuance - 2011 vs. 2010

€ Bln

0

100

200

300

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Securi tised Products 2010 Securitised Products 2011

Covered 2010 Covered 2011

Issuance

Source: IFR, Bloomberg, Morgan Stanley Research Source: IFR, Bloomberg, Morgan Stanley Research

Note: Includes public and privately placed issuance onlySource: IFR, Bloomberg, Morgan Stanley Research Source: IFR, Bloomberg, Morgan Stanley Research

Issuance by Currency

0%

20%

40%

60%

80%

100%

2006 2007 2010 YTD 2011EUR GBP USD Other

Historical Placed Issuance

2011 Issuance Summary (€ bln)

€ Bln

-

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD2011

-

100

200300

400500

600

Issuance Amt No of Deals (RHS)

County/Sector RMBS CMBS ABS CLO WBS Total

GB 27.0 1.1 5.9 0.8 2.3 37.1

NL 9.2 - 1.7 - - 10.9

DE - - 4.2 - - 4.2

IT 3.1 - - - - 3.1

Other - - 2.7 0.3 - 2.9

Total 39.2 1.1 14.5 1.1 2.3 58.3


13


Issuance by Ratings

0%

20%

40%

60%

80%

100%

2006 2007 2010 YTD 2011AAA AA A BBB and lower

Issuance (Cont.)



Visible Pipeline

AnnounceDate Issuer Originator

Sector - Collateral Currency Size (mln) Status

29/09/11 Silverstone Nationwide Buliding Society RMBS - Prime GBP NA Roadshow

08/07/11 Paragon Paragon RMBS - BTL GBP 200

06/07/11 Kenrick No 1 West Bromwich Building Society RMBS - Prime GBP NA Postponed

Issuance by WAL

Most Active Originators in 2011

0%

20%

40%

60%

80%

100%

2006 2007 2010 YTD 2011Less than 3 yrs 3 to 5 yrs More than 5 yrs NA

OriginatorNo of Deals in

2011Issuance in 2011 (€ Bln)

No of Deals in 2010

Issuance in 2010 (€ Bln)

Lloyds 5 10.1 2 2.1

Santander 7 9.6 5 11.9

RBS 1 4.3 1 4.5

Obvion (Rabo) 6 3.9 3 1.9

Volkswagen 5 3.7 1 0.4

Others 42 26.7 33 47.7

Total 66 58.3 45 68.5


14


€ Bln

-20

-10-10

2030

40

2006 2007 2008 2009 2010 YTD 201160

70

80

90

100

Gross Issuance Redemptions Bal Outstanding (RHS)

Redemptions and Net Issuance

Date Deal Classes Seller SectorAmount

(EUR mln)Redemption

Type17/10 HMI 2007-2X 3A1, 3A2, 3A3 Abbey UK Prime 962.6 Step-up Call17/10 HMI 2010-1X A1 Abbey UK Prime 365.2 Step-up Call17/10 PERMM 2006-1 4A2, 4B, 4C Abbey UK Prime 1,133.6 Step-up Call21/10 STORM 2004-2 Entire deal Obvion NL Prime 814.8 Step-up Call

Dutch RMBS

Note: Includes call payments and amortisation based on Bloomberg default CPR.Source: Bloomberg, Morgan Stanley Research

Note: Includes only scheduled redemptionsSource: Bloomberg, Morgan Stanley Research

Source: Bloomberg, Morgan Stanley Research Source: Bloomberg, Morgan Stanley Research

UK Prime RMBS

Redemption Pipeline – Next 12 months Redemption Calendar – October 2011

€ Bln

-80

-40

-

40

80

120

2006 2007 2008 2009 2010 YTD 2011-

50

100

150

200

250

Gross Issuance Redemptions Bal Outstanding (RHS)

€ Bln

-

2

4

6

8

10

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

UK Prime Dutch RMBS


15


New Issue Activity – Last Four Weeks

Pricing Date Issuer Name Originator Country Sector - Collateral Deal Size (EUR mln) Class Currency Size (mln) Rating (S/M/F) WAL Pricing

14/09/11 HOLMES MASTER ISSUER PLC 2011-3 Santander UK GB RMBS - Prime 2,760.3 A1 USD 500.0 A1+ / P1 / F1+ 0.8 1ML + 13 bp

A2 USD 2,000.0 AAA / Aaa / AAA 2.9 3ML + 155 bp

A3 EUR 200.0 AAA / Aaa / AAA 2.9 3ME + 140 bp

A4 GBP 165.0 AAA / Aaa / AAA 4.6 3ML + 165 bp

A5 USD 500.0 AAA / Aaa / AAA 7.3 3ML + 175 bp

A6 USD 250.0 AAA / Aaa / AAA 7.3 3ML + 175 bp

22/09/11 Gracechurch Card 2011-4 A Barclays Bank GB ABS - Credit cards 1,100.0 A EUR 1,100.0 AAA / Aaa / NA 2.96 1ME + 75 bp

22/09/11 Volkswagen Car Lease 14 VW Bank DE ABS - Autos 815.6 A EUR 790.0 AAA / Aaa / NA 1.3 1ME + 65 bp

B EUR 25.6 A+ / A1 / NA 1.85 1ME + 150 bp

06/10/11 Arena 2011-2 Delta Lloyd NL RMBS - Prime 713.0 A1 EUR 155.0 AAA / Aaa / NA 2 3ME + 125 bp

A2 EUR 558.0 AAA / Aaa / NA 4.9 3ME + 165 bp

06/10/11 Turquoise 2011-1 HSBC GB ABS - Credit cards 374.6 A USD 500.0 NA / Aaa / AAA 2.9 1ML + 75 bp

07/10/11 Smart 2011-3 Macquarie AU ABS - Autos 578.4 A-1 AUD 144.0 NA / P-1 / F1+ 0.37 1MBBSW + 60 bp

A-2A AUD 473.4 NA / Aaa / AAA 2.26 1MBBSW + 160 bp

A-2G GBP 110.0 NA / Aaa / AAA 2.26 1ML + 120 bp

07/10/11 Gracechurch Card 2011-5 Barclays Bank GB ABS - Credit cards 749.1 A USD 1,000.0 AAA / NA / NA 1.49 1ML + 55 bp

Source: IFR, Bloomberg, Morgan Stanley Research Note: Deals in bold priced last week


16


Weekly CMBS Loan Activity

Date Deal LoanLoan Balance

(mln)Deal Balance

(mln) Event Summary

03/10/2011 WINDM XIV QueenMary € 27.5 € 775.7 Valuation Update Updated valuation of €45.68 mln received by the servicer; the updated LTV is 67.03, below the covenant of 72.5.

03/10/2011 WINDM X Thunderbird € 118.5 € 1,199.0 Valuation Update Updated valuation of €151.29 mln received by the servicer; the updated LTV is 80.41 below the covenant of 82.5.

03/10/2011 TMAN 6 Orange € 392.8 € 1,033.5 Maturity Extension The Standstill period has been extended upto 7 Oct 2011, to facilitate loan extension discussions.

03/10/2011 TITN 2007-1 Libra Loan € 610.2 € 610.2 Tenant Restructuring

Restructuring of the principal tenant (Southern Cross) in progress. Restructuring involves assignment of operating leases and transfer of the business and assets to the landlords. In return the borrowers will continue to provide additional working capital to SC by forbearing from enforcement rights and providing deferral for Sep-2011 rent. Business purchase agreements covering 70% of SC's care homes have been entered into, and 33% of the homes have been transitioned to new operators. Further transfers to follow in Oct and Nov.

03/10/2011 ECLIP 2006-4 Ashbourne Portfolio € 72.7 € 789.2 Tenant Restructuring

Restructuring of the principal tenant (Southern Cross) in progress. Further to SC's surrender of occupational leases on Ashbourne properties, the Ashbourne Landlord is requesting for consent to transfer the operation of the homes to Orchard Care Homes.Com Ltd and Adiemus Care Limited. In light of the additional working capital requirements, the borrower has requested for and secured a deferral of contractual payments for 6 months. The transaction is therefore expected to draw on on its liquidity facility to make coupon payments during Oct-2011 and Jan-2012 IPDs.

03/10/2011 ECLIP 2006-1 Ashbourne Portfolio Priority A € 72.7 € 250.5 Tenant Restructuring

Restructuring of the principal tenant (Southern Cross) in progress. Further to SC's surrender of occupational leases on Ashbourne properties, the Ashbourne Landlord is requesting for consent to transfer the operation of the homes to Orchard Care Homes.Com Ltd and Adiemus Care Limited. In light of the additional working capital requirements, the borrower has requested for and secured a deferral of contractual payments for 6 months. The transaction is therefore expected to draw on on its liquidity facility to make coupon payments during Oct-2011 and Jan-2012 IPDs.

04/10/2011 WINDM X Built Loan € 8.0 € 1,199.0 Special Servicing As result of failure to pay on the loan maturity date of 30 Sep 2011, the loan has been transferred to special servicing on 3 Oct 2011

05/10/2011 WINDM XII Coeur Defense € 1,519.0 € 1,519.0 Other Cash Management agreement with Heart of La Defense SAS renewed till 10 Jan 2012.

05/10/2011 TITN 2006-3 Monnet Portfolio € 67.3 € 781.1 Acceleration Notice Special Servicer excercised its acceleration rights and issued a notice of acceleration for the immediate repayment of principal (67.3mln) and interest accrued (3.8m).

Source: Trepp, Bloomberg, Morgan Stanley Research


17


Weekly CMBS Loan Activity (Cont)

Date Deal LoanLoan Balance

(mln)Deal Balance

(mln) Event Summary

05/10/2011 ECLIP 2007-1 Adelphi € 213.3 € 780.2 Servicing UpdateA consensual sale process was in place but certain events have raised a doubt on whether the loan will be repaid by its maturity date (25 Oct). Discussions with the borrower, junior lender and counterpaties continues.

05/10/2011 BUMF 1-7 Reference Pools - - Other Changes made to deal documents to accommodate cash manager's (Barclay's) BACS rules requirements

06/10/2011 TAURS 2007-1 Barana € 40.8 € 57.5 Prepayment The loan was scheduled to mature on 30 Apr 2014 but has been prepaid fully. The funds will be used to repay bonds on 4 Nov 2011 payment date.

06/10/2011 EURO 25 Aprirose Retail Bonndorf € 3.2 € 817.3 Standstill Agreement Loan failed to repay at maturity (8 Aug 2011). The lender has agreed to a standstil period till 25 Oct 2011

06/10/2011 EURO 25 Aprirose Munich Thun € 16.7 € 817.3 Standstill Agreement Loan failed to repay at maturity (8 Aug 2011). The lender has agreed to a standstil period till 25 Oct 2011

06/10/2011 EPICP INDU Industrious € 472.7 € 472.7 Other Verification Agent appointed to determine the Credit Protection Payment Amount.

06/10/2011 ECLIP 2007-2 Den Tir (Snr + Jnr) € 30.5 € 767.3 Servicing Update The special servicer holds €1.4 mln from vendor settlement and pursue a consensual sale with the Borrower. A further update will be provided by 10 Dec 2011 the latest.

07/10/2011 MARL 1 (EMC II) Portfolio € 46.1 € 46.1 Liquidity Draw The issuer made a draw of €157,354 under its liquidity facility with Barclays to address interest shortfall on Classes C&D, which arose as a result of mismatch in payments and receipts.

07/10/2011 EPOP ARL2 Arlington Portfolio € 407.7 € 407.7 Property Sale Gross sale proceeds of £140 mln realised on the sale of Reading International Business Park. Net proceeds (£132.3mln) will be applied pro-rata to pay notes on the next IPD.

Source: Trepp, Bloomberg, Morgan Stanley Research


18


(7.0)

(5.0)

(3.0)

(1.0)

1.0

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11

AAA Subs

Performance39%

Others9%

Counterparty37%

Sovereign15%

Rating Actions Summary

Source: Bloomberg, Rating Agencies, Morgan Stanley ResearchNote: Does not include Leverage Loan CLOsSource: Bloomberg, Rating Agencies, Morgan Stanley Research

Note: Drift = 6mo. average of (Upgrades-Downgrades)/All Rating ActionsSource: Bloomberg, Rating Agencies, Morgan Stanley Research

Source: Bloomberg, Rating Agencies, Morgan Stanley Research

Ratings Drift – By Sector

2011 Downgrades – By Rationale

Rating Actions and Drift

Average Downgrade Intensity – Senior vs. Subs

(1,000)

(800)

(600)(400)

(200)

-200

400

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11(0.8)(0.6)(0.4)(0.2)-0.20.40.60.8

Upgrades (LHS) Downgrades (LHS) Ratings Drift (RHS)

(1.5)

(1.0)

(0.5)

-

0.5

1.0

1.5

Feb-07

Jul-07

Dec-07

May-08

Oct-08

Mar-09

Aug-09

Jan-10

Jun-10

Nov-10

Apr-11

Sep-11

ABS CMBS RMBS LL CLO


19


Weekly Rating Actions

Upgrades

Downgrades

Action Date Transaction Originator Country Sector Class ISIN Agency Old Rating New Rating Rationale03/10/11 FTPYME SANTANDER 1 Banco Santander ES CLO B2 ES0339773022 Fitch AA+ AAA Performance

C ES0339773030 Fitch A+ AA Performance04/10/11 RESIDENTIAL MORTGAGE SECURITIES 20X Kensington Mortgages GB RMBS M2A XS0213178709 S&P A A+ Performance

M2C XS0213179343 S&P A A+ Performance06/10/11 E-MAC NL 2007-NL4 GMAC-RFC,Quion 20 BV,Atlas Funding NL RMBS C XS0325183621 S&P A- A Performance

Action Date Transaction Originator Country Sector Class ISIN Agency Old Rating New Rating Rationale30/09/11 VENUS FINANCE SRL 2006-1 San Paolo IMI IT ABS A IT0004148026 Fitch AAA BBB Performance

B IT0004148034 Fitch AA BB PerformanceC IT0004148042 Fitch A B PerformanceD IT0004148059 Fitch BBB CCC PerformanceE IT0004148067 Fitch BB CC Performance

PROMISE PLC XXS6-1 HVB, Bank Austria DE CLO A XS0277602016 S&P AAA AA+ PerformanceB XS0277606272 S&P AA A+ PerformanceC XS0277606512 S&P A BBB- PerformanceD XS0277606942 S&P BBB BB- PerformanceE XS0277607320 S&P BB CCC PerformanceF XS0277608211 S&P B- CCC- Performance

03/10/11 FTA SANTANDER PUBLICO 1 Santander Central Hispano ES CLO A ES0338185004 Fitch AAA AA PerformanceB ES0338185012 Fitch A BBB Performance

DECO 8-C2X Deutsche Bank GB CMBS A2 XS0251886163 Moody's Aa3 A2 PerformanceB XS0251886833 Moody's Baa2 Ba1 PerformanceC XS0251887211 Moody's Ba1 Ba3 PerformanceD XS0251887724 Moody's B2 B3 PerformanceE XS0251889696 Moody's Caa2 Caa3 Performance

CR FIRENZE MUTUI SRL 1 Banca CR di Firenze IT RMBS B IT0003391478 S&P AA- A+ Counterparty04/10/11 BERICA RESIDENTIAL MBS SRL 6 Banca Nuova, Cassa di Risparmio di Prato, B IT RMBS B IT0004013808 Moody's A1 A3 Performance05/10/11 Windermere X Lehman Brothers EU CMBS D XS0293898457 Fitch B CCC Performance

E XS0293898887 Fitch CC C PerformanceF XS0293899265 Fitch CC C Performance

Source: Bloomberg, Rating Agencies, Morgan Stanley Research Note: Excludes Leverage Loan CLOs. The Thursday of the week is used as cutoff date.


20


Weekly Rating Actions (Cont.)

Downgrades (Cont)Action Date Transaction Originator Country Sector Class ISIN Agency Old Rating New Rating Rationale06/10/11 ASTREA SRL 2002-1 Meliorbanca S.p.a. IT ABS A IT0003331292 Moody's Aa3 A2 Sovereign

D'ANNUNZIO SRL I Region of Abruzzo IT ABS A IT0004039613 Moody's A2 Baa1 SovereignPosillipo Finance 2007-1 Region of Campania IT ABS A IT0004220668 Moody's A3 Baa2 SovereignPosillipo Finance 2007-2 Region of Campania IT ABS A1 IT0004240351 Moody's A3 Baa2 SovereignRubino Finance Srl 2006-1 Region of Sicily IT ABS A IT0004145857 Moody's A1 A3 SovereignE-MAC NL07-I GMAC RFC NL RMBS C XS0292258695 S&P A- BBB Performance

D XS0292260162 S&P BBB BB PerformanceE XS0292260675 S&P BB B Performance

E-MAC 2007-NL3 GMAC-RFC NL RMBS C XS0307682723 S&P A+ A PerformanceD XS0307683291 S&P BBB BB PerformanceE XS0307683531 S&P BB B Performance

E-MAC NL 2007-NL4 GMAC-RFC,Quion 20 BV,Atlas Funding NL RMBS D XS0325184355 S&P BBB- BB+ Performance

Source: Bloomberg, Rating Agencies, Morgan Stanley Research Note: Excludes Leverage Loan CLOs. The Thursday of the week is used as cutoff date.


21


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22


Disclosure Section (Cont.)

Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.Analyst Stock Ratings Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months. Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports.Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures.For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html.Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.Other Important Disclosures Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

10032,810Total26%10%10414%400Underweight/Sell21%2%234%112Not-Rated/Hold36%42%41942%1168Equal-weight/Hold40%46%45740%1130Overweight/Buy

% of Rating Category % of Total IBCCount% of TotalCountStock Rating Category

Investment Banking Clients (IBC)Coverage Universe

10032,810Total26%10%10414%400Underweight/Sell21%2%234%112Not-Rated/Hold36%42%41942%1168Equal-weight/Hold40%46%45740%1130Overweight/Buy

% of Rating Category % of Total IBCCount% of TotalCountStock Rating Category

Investment Banking Clients (IBC)Coverage Universe


23


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