presentation of: relative value in securitized investments insurer investment forum viii march 21,...

Presentation of:Relative Value in Securitized Investments

Insurer Investment Forum VIIIMarch 21, 2013

Insurer Investment Forum VIII

Agenda

I. U.S. Macroeconomic Overview

II. Securitized Investment Positioning and Risk within Insurance Strategies

III. Relative Value in Asset-backed Securities (ABS)

IV. Relative Value in Commercial Mortgage-backed Securities (CMBS)

V. The Housing Recovery and Non-Agency Residential Mortgage-backed-Securities (RMBS)

VI. AppendixI. Modeling Processes and Case Studies

II. Biography


The U.S. Macroeconomic Overview

An Overview of our Economic Forecast

● Despite larger than anticipated fiscal drag, we are maintaining our projection for 1.5% real GDP growth this year

- There has been improvement in the composition of growth over the past few quarters

> Private demand (e.g. consumer spending, business investment and housing) added 2.7% to growth in the 4th quarter

- The economy may be poised to rebound from below trend growth from last year

> The economy grew at an annual rate of just 1.5% last year versus trend growth of 2.1% since the recovery began in 2009. It appears reasonable that in the long run, below trend growth would be offset by slightly higher trend growth going forward.

● Our baseline for 2013 real GDP growth is in the 2.4% to 2.7% range.

- Subtract fiscal drag of 2.2% of GDP, which occurs mostly in the second and third quarter when sequestration hits Q1 Q2 Q3 Q4

2012 Actual GDP 2.0% 1.3% 3.1% -0.1%

2013 Forecased GDP 1.5% 1.0% 1.3% 2.5%


The U.S. Macroeconomic Overview

January FOMC Summary

● Largely in line with market expectations.

● Fed views the economy on a moderate growth path with downside risks declining; however:

- Concern over automatic spending cuts associated with sequestration

● Household balance sheets are improving, which should support spending; though increases from payroll taxes could have a negative impact

● More businesses reported an improvement in confidence and the prospects of an improved economic outlook

● Extensive and somewhat divided discussion about the efficacy of the Fed’s QE program

- Most participants believe asset purchases have been effective in easing financial conditions, though not as fast as the Committee would like

- Some expressed concern over costs and risks arising from further asset purchases

- Some participants emphasized the Committee should be prepared to vary the pace of purchases, in response to either changes economic outlook or efficacy and costs of such purchases


Positioning and Risk within Insurance Strategies

Current Strategies and Positioning

● Most of our multi-sector insurance strategies are slightly short duration in the ten (10) year part of the curve (e.g. 0.1 – 0.2 of year)

● Accounts are primarily underweight US Government and Agency securities while correspondingly overweight spread sectors (e.g. Investment grade credit, ABS and CMBS)

● Securitized strategies within insurance mandates consist primarily of investment grade Auto and Equipment ABS, along with well structured legacy CMBS and 2.0/3.0 and five (5) year new issue AAA-rated CMBS

● Given the richness of the new issue non-agency RMBS market and the ratings constraints of our insurance clients, we hold minimal credit sensitive RMBS.


Relative Value in Asset-backed Securities (ABS)

“It is not the return on my investment that I am concerned about. It’s the return of my investment.” - Will

Rogers



Consider the Investment Landscape and Current Market Challenges, Risks, and Needs:

● Investors face historic low levels of global interest rates

● Given the state of the global economy, monetary policy is likely to remain accommodative for the next several years

● Investors face asymmetric risk/return for extending duration out the yield curve. Real yields are in fact negative

● Investors must navigate continued fiscal turmoil in Europe’s peripheral economies

● Sovereign debt risks continue to pose potential for greater financial contagion, introducing increased counterparty risk

● Investors require a need for diversification, current yield, a return on investment, and critically, a return of investment


Relative Value in Asset-back Securities (ABS)

Consumer Finance ABS

● Primary ABS Sectors:

- Automobile Loan and Lease securities

- Equipment Loan and Lease securities

- Bank Sponsored, and Retail Credit Card loan-backed securities

- Government and select private issued Student loan-backed securities

● The above asset classes represent historically some of the highest quality, best performing sectors, even during the peak of the global financial crisis.

● Newly issued securities in these asset classes are generally characterized by conservative underwriting.


Relative Value In Asset-backed Securities (ABS)

What Consumer ABS Investments Offer:● High Quality and Strong Fundamentals:

- Strong historical credit performance, even during periods of unprecedented stress- Investments backed by homogenous and diversified collateral pools that have been

underwritten to conservative standards.- History of positive ratings actions- While sovereign and corporate ratings under pressure since the onset of the crisis, the ABS

ratings remains largely stable to positive

● Liquidity: - Self liquidating structures, special purpose bankruptcy remote structures that mitigate

individual counterparty risks.- Historically a safe haven for excess liquidity; returns above cash and money market

instruments- Short duration alternative to corporate debt- Expected continued strong issuance (Note: $175 Billion in 2012)- TRACE reporting enhances liquidity and increases transparency

● Attractive Risk/Yield Characteristics:- Low interest rate duration risk (e.g. 1 – 3 years)- Attractive yield spread premiums (e.g. margins of +15 to +150 bps vs. swaps or LIBOR

based on defined risk tolerances)- A modest return on investment and the expected full return of principal



Source: Moody’s as of December 31, 2012*Moody’s to provide in March 2013; † Average to December 31, 2011.

Consider the credit quality of ABS vs. other securitized investments

2012 2011 2010 Hist Avg† 2012 2011 2010 Hist Avg†

U.S. ABS excluding RMBS 9.9% 9.1% 4.8% 6.5% 4.3% 4.8% 4.8% 2.2%

US Auto Loans (*) 0.0% 0.0% 2.9% (*) 21.8% 21.8% 6.0%

U.S. Credit Cards (*) 0.0% 0.8% 2.0% (*) 7.4% 7.4% 2.5%

U.S. Student Loans (*) 6.6% 6.3% 4.5% (*) 2.9% 2.9% 1.0%

U.S. Equipment Lease (*) 0.7% 5.6% 4.3% (*) 1.9% 1.9% 2.5%

U.S. RMBS/HEL 11.5% 23.4% 36.5% 20.9% 2.8% 0.8% 0.8% 1.2%

J umbo (post-1999 vintages) (*) 35.7% 45.1% 20.5% (*) 0.9% 0.9% 1.9%

Alt-A/Option ARM (post-1999 vintages) (*) 17.2% 47.0% 33.9% (*) 0.5% 0.5% 0.4%

Subprime (post-1999 vintages) (*) 23.4% 24.9% 28.2% (*) 1.4% 1.4% 0.7%

U.S. CMBS 16.3% 11.1% 44.3% 14.5% 5.3% 2.8% 2.8% 6.4%

excl CRE CDOs (*) 9.3% 39.1% 12.0% (*) 2.8% 2.8% 6.8%

12-Month Donwgrade Rate 12-Month Upgrade Rate

Structured Finance 12-Month Downgrade/Upgrade Rates by Sector*



Consider de-leveraging consumers and stronger household balance sheets:

● De-leveraging consumer household balance sheets should translate into continued strong credit performance

Source: Bloomberg, Federal Reserve as of January 25, 2013.*DSR (Debt Service Ratio) - estimate of the ratio of debt payments on mortgage and consumer debt to disposable personal income.FOR( Financial Obligations Ratio) - takes DSR and adds other payments such as auto leases, rents, homeowners insurance, and property taxes.

Household Debt Service & Financial Obligations*

14.05

10.61

18.95

15.74

8%

10%

12%

14%

16%

18%

20% DSR FOR



Tactical and Strategic

● ABS investments can be both tactical and strategic. Consider the tactical approach:

− Attractive return given lower term structure of interest rates

− Shorter duration. Asymmetric risks associated with extending duration out the curve (e.g. Long spread duration and negative inflation adjusted returns

− Global economic and fiscal uncertainty

● The tactical play: As monetary policy shifts from accommodative, other more attractive investments may arise

● Conversely consider a strategic approach: ABS investments can be strategic and defensive against rising interest rates

Liquidity Considerations

● Tactical: If longer duration alternatives become more attractive, the tactical strategy can be easily unwound

− ABS duration “roll-down” (e.g. 0-1 years) allows for more liquid sales transactions

− ABS portfolios can be designed to self liquidate through amortization, eliminating need for sales, permitting reinvestment of pay downs in other strategies

● Strategic: If short term rates rise, the ABS portfolio re-prices with the market

− Higher current coupons

− Low duration risk

− Less price sensitivity



Current Spreads and Yields:

Spread SpreadAsset Class WAL Rating to Swaps Yield Asset Class WAL Rating to Swaps Yield

Prime Auto 1yr AAA 6 0.39% Subprime Auto 1yr AAA 18 0.49%2yr AAA 10 0.56% 2yr AAA 22 0.61%3yr AAA 14 0.79% - - - -4yr AA 40 1.16% 3yr AA 60 1.08%4yr A 60 1.37% 4yr A 100 1.58%4yr BBB 110 1.87% 4yr BBB 145 2.11%

4yr BB 200 2.66%

Spread SpreadAsset Class WAL Rating to Swaps Yield Asset Class WAL Rating to Swaps Yield

Auto Lease 1yr AAA 8 0.39% Equip. Lease 1yr AAA 10 0.45%2yr AAA 18 0.56% 2yr AAA 19 0.69%2yr AAA 26 0.79% 4yr AAA 24 1.01%

4yr AA 58 1.37%




Spread SpreadAsset Class WAL Rating to LIBOR Yield Asset Class WAL Rating to LIBOR Yield

FFELP 1yr AAA 17 0.37% Private 2yr AAA 60 0.80%Student Loan 3yr AAA 25 0.45% Student Loan 5yr AAA 105 1.25%

7yr AAA 55 0.75%9yr A 225 2.45%

Spread SpreadAsset Class WAL Rating to LIBOR Yield Asset Class WAL Rating to Swaps Yield

Bank Credit Card 3yr AAA 15 0.35% Dealer 3yr AAA 38 0.86%3yr BBB 40 0.60% Floorplan 3yr AA 65 1.13%5yr AAA 26 0.46% 3yr A 90 1.38%5yr BBB 60 0.80% 3yr BBB 135 1.83%


Relative Value in Commercial Mortgage-backed Securities (CMBS)

“I would give a thousand furlongs of sea for an acre of barren ground.”

-Shakespeare



● Consider improving rent growth and declining vacancy rate among all major property types

Source: Amherst Securities Group LP, Property and Portfolio Research as of September 30, 2012.

Rent Growth

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Industrial Multi-Family Office Retail

Vacancy Rates

0%

2%

4%

6%

8%

10%

12%

14%

16%

Industrial Multi-Family Office Retail

Fundamentals: Rent Growth and Vacancies


Relative Value in Commercial Mortgage-back Securities (CMBS)

Source: Source. Jeffries and CB Richard Ellis as of September 30, 2012. 2012 data is for

National Net Absorption (SF) Rates (Retail, Office, Industrial) Amidst U.S. Recessions

(300,000)

(200,000)

(100,000)

-

100,000

200,000

300,000

400,000

Retail Office Industrial

National Net Absorption Rates (Multifamily and Hotel ) Amidst U.S. Recessions

(150)

(50)

50

150

250

350

1,100

1,150

1,200

1,250

1,300

1,350

1,400

1,450

1,500

Multifam

ily (Units) x1000H

otel

(Roo

ms)

x10

00

Hotel Multifamily

Fundamentals: Net Absorption Rates

● Absorption rates remain positive among all major property types, with industrial and hotel showing stronger upward momentum



Source: Real Capital Analytics, Wells Fargo Securities, LLC as of December 31, 2012.

● Consider current cap rate spreads relative to 10-Year Treasuries. Cap rate spreads are poised to converge from historically wide levels.

Cap Rate Spreads

100

150

200

250

300

350

400

450

500

550

1%

3%

5%

7%

9%

11%

Spre

ad (b

ps)

10-Year Treasury All Property Cap All Property Spread Long Term Avg

Long Term Average Spread 358 bps

Fundamentals: Cap Rates and Spreads



● Very low levels of construction spending will persist given continued problems with legacy construction loans.

* Preliminary

Source: U.S. Census Bureau as of December 31, 2012.

Private Construction $ Millions Put In Place; Seasonally Adjusted US Census Bureau

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec2012*

$ M

illion

s

Lodging Office Commercial

Fundamentals: Construction Spending



● Consider the quality of newly originated commercial real estate loans. Today’s loans consist of much stronger credit characteristics versus loans originated at the peak of the credit cycle (2006 through 2008)*

* Data as of February 14, 2013. Source: Standish, Trepp® and deal prospectuses. 2006-2008 and past 6 months are for fixed rate conduit transactions only.

Current Last 6 month

Originated LTV 68% 62%Loans with LTV > 70% 50% 21%

Interest Only Loans, including partial I/O 79% 40%

Debt Service Coverage Ratio (DSCR) 1.43 1.79DSCR < 1.4 times 64% 11%DSCR > 1.6 times 16% 51%

Average Rating Agency Stressed LTV 104% 93%Subordinated Debt in place 19% 11%Subordinated Debt permitted 28% 12%

CMBS Loan Collateral Characteristics2006 - 2008Average





Spread SpreadAsset Class Vintage WAL to Swaps Yield * Asset Class WAL Rating to Swaps Yield *

Legacy CMBS 2005 2yr 60 0.98% New Issue 2yr AAA 25 0.63%LCF AAA 2006 3yr 70 1.21% Conduit CMBS 5yr AAA 50 1.45%

2007 4yr 110 1.81% 7yr AAA 85 2.29%Legacy AM 2006 3yr 200 2.51% 10yr AAA 85 2.85%

2007 4yr 225 2.96% 10yr AAA-S 120 3.20%10yr AA- 150 3.50%10yr A- 200 4.00%10yr BBB- 375 5.75%

SpreadAsset Class WAL Rating to Swaps Yield *

Agency CMBS 3yr AAA 18 0.70%4yr AAA 21 0.91%5yr A 140 2.23%5yr BBB 250 3.33%

* Based on US Swap curve, mid day 3/ 6/ 2013


The Housing Recovery and Non-Agency RMBS

“The dream of our older generation was to pay off the mortgage. The dream of our current generation is to get

one.” - Unknown



●Supply is beginning to reach an equilibrium with demand.

●Over-supply was result of over-building when home prices were rising and high defaults when home prices were declining.

●Existing home sales inventory has fallen to 1.74 million homes* from a peak of 4.04 million homes in July 2007. This is now close to historical norms.

●Shadow Inventory is the number of properties that are either in foreclosure or real estate owned but not listed for sale. Shadow inventory is down 34% since the peak of 5.370 million home in January Q4 2009.

●We expect the shadow inventory to continue to decline, leading to less distressed sales.* Source: National Association of Realtors as of January 2013

Existing Home Inventory

Source: National Association of Realtors as of January 31, 2013

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Millio

ns

Shadow Inventory

Source: Standish, Bloomberg, December 2012

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

$ m

illio

n

Projected



●Home sales have been trending upward for several months.

●Existing home sales are up 1.9% in January 2013 versus a year ago.

●New home sales have risen 28.9% in January 2013 versus a year ago, but are still close to historic lows.

●Pending home sales, which tracks the number of home re-sales under contract, have been increasing. Pending home sales is a leading indicator of existing home sales by one or two months.

U.S. Sales

Source: National Association of Realtors, US Census Bureau as of January 31, 2013

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Mill

ions

New Home Sales Existing Home Sales

Pending Home Sales

Source: National Association of Realtors as of January 31, 2013

60

70

80

90

100

110

120

130

140



●Home affordability is close to all-time highs. High levels of affordability have traditionally translated into more home sales

●At the current level of the NAR Homebuyer Affordability Index, a borrower who earns the median income in the U.S. can afford 201% of a median-priced existing single family home

●Lack of job growth during the recession led to many echo boomers, those born between 1982 and 1995, staying at home or renting. New household formation ran below trend from 2007-2011 and suggests that lack of demand was one of the causes of the excess housing supply.

●Estimates are that actual household formation is more than two million households below trend. We expect that an economic recovery will boost the momentum in housing as this pent-up demand eventually absorbs the excess housing inventory.

NAR Homebuyer Affordability Index

Source: National Association of Realtors as of December 31, 2012

50

75

100

125

150

175

200

225Index Average

Index at 100: Median income household has exactly enough income to qulify for the purchase of a median-priced exting single family home. Assumptions: 20% downpapayment, 25% gross income devoted to mortgage principal & interest payments.

Household Formation

Source: Standish, US Census Bureau as of December 31, 2012

104,000

106,000

108,000

110,000

112,000

114,000

116,000

118,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Thou

sand

s

Households Trend



● Home prices are a lagging indicator of a housing recovery, but the data is starting to turn more positive.● The Case Shiller Index is up 6.8% in December 2012 from December 2011. The CoreLogic Home Price

Index rose 8.3% in the same period.● Median prices on existing and new home sales are also rising. The median price of existing homes is up

12.3% in January from a year earlier. The median price of new homes is up 2.1% in January from a year earlier.

● The mix of sales has contributed to the better year-over-year home price numbers. There have been fewer distressed home sales, as well as an improvement in pricing on distressed sales. Modification programs, increased short sales, and REO to Rental programs have all helped to improve pricing on sales.

● We still expect seasonal weakness through the winter, but feel that prices have bottomed and should begin rising in 2013.

Home Price Indices

Source: Core Logic, S&P as of December 31, 2012

100

120

140

160

180

200

220

Pric

e In

dex

CoreLogic Case Shiller (SA)





Spread SpreadAsset Class WAL Rating to Tsy Yield * Asset Class WAL Rating to Tsy Yield *

Non-Agency RMBS 5yr AAA 112 1.99% FNCL 3.00% 7yr AAA 118 2.50%SEMT Jumbo-A 5yr AAA 114 2.10% FNCL 3.50% 5yr AAA 140 2.16%

5yr AAA 117 2.02%

* Based on Tsy market data at time of SEMT pricing, using Standish prepayment assumptions

Appendix

ABS Modeling Process

Standish’s ABS modeling process is a comprehensive approach that considers issuer-specific collateral credit and prepayment behavior, while also considering deal- and vintage- specific characteristics. Its process is dynamic and continuously calibrated to consider the effects of changing collateral performance, loan prepayment patterns, and servicer behavior. Highlights of our process include:

● Expected Loss- Loss to liquidation projection.- Assumptions periodically adjusted to reflect changing collateral performance.

● Default Propensity- Default timing curves fit to modeled deal expected loss.- Adjusted for issuer, collateral characteristics, and macro environment.

● Loss Severity- Collateral and vintage specific assigned severities.- Adjusted periodically given performance and outlook for after market disposition.

● Voluntary Prepayments- Collateral and vintage specific assigned speeds.- Pricing speeds adjusted to incorporate expected defaults (involuntary prepays).

● Other- Intex used as primary cash flow engine.- Utilize third party and internally developed research to analyze collateral at a granular

level.- A multi-scenario approach to evaluate risk across a range of outcomes.

Appendix

ABS Investment Process Example – Auto ABS

CONCLUSION: Tighter issuer underwriting standards and higher required credit enhancement from the rating agencies should help this deal perform at least in-line with historical issuance. Our stress scenario attempts to approximate what a 'double-dip' scenario may look like and assumes a repeat of the increased default rates seen in 2008/2009. We are comfortable that this harsh scenario results in implied ratings that are only one rating category below our base case ratings. Given the de-leveraging nature of the structure, the break-even default rates will increase over time and provide added protection to these deals.

Case Study: 2010 Vintage Subprime Auto ABS C Tranche

Standish, Intex as of December 2012. This case study is representative of a type of ABS investments owned and managed in client portfolios, and highlights the fundamental drivers of our investment process.

Deal Level: Bond Level (C Class):Base Scenario = 14.5% Base Scenario = 14.1%Stress Scenario = 19.4% Stress Scenario = 18.9%

To Maturity To 10% CallBase Scenario 1.77yr 1.74yrStress Scenario 1.72yr 1.68yr

Projected Net Collateral Loss

Average Life Variability

S&P = 13.25% - 13.75% Moody's = 16%RATING AGENCY EXPECTED DEAL NET COLLATERAL LOSS:

Flat Default Rate: BASE STRESS Default Curve: BASE STRESSBreak-Even Default Rate 37.9 32.2 Break-Even Default Curve 287x 238xBreak-Even Cumulative Net Loss 34.0% 35.7% Break-Even Cumulative Net Loss 34.7% 36.4%Loss Multiple/Internal Rating 2.4x/A 1.9x/BBB Loss Multiple/Internal Rating 2.5x/A 1.9x/BBB

Break-Even Analysis

Weighted Average FICO: 590 Weighted Average Loan Balance: $14,341Weighted Average APR: 18.2% Weighted Average Loan Seasoning: 8 mosWeighted Average LTV: 113% Loans with original terms > 60 mos: 70%Used Vehicles: 68.7% Chevy: 18.2%, Ford: 11.3%, Dodge: 11.2%

COLLATERAL SNAPSHOTAAA 43.5%AA 32.5% Estimated excess spread per year = 11.3%A 21.0% Initial overcollateralization = 13% of initial balanceBBB 15.0% Target overcollateralization = 23.25% of current balance

INITIAL CREDIT ENHANCEMENT

Appendix

ABS Investment Process Example – Auto ABS

Standish, Intex as of December 2012. This case study is representative of a type of ABS investments owned and managed in client portfolios, and highlights the fundamental drivers of our investment process. Timeline Notes: Dec 2010 - Changed base case default assumption to 80% of initial curve; Mar 2011 - Changed base case default assumption to 60% of initial curve; May 2011 - Changed base case default assumption to 50% of intial curve & base case severity assumption to 60%; Aug 2011 - Moody's rating raised from A1 to Aaa; Dec 2011 - S&P rating raised from A to A.

Default Rate

0

2

4

6

8

10

12

14

16

Axis

Titl

e

Base Case Default Curve Actual Default Rate

Severity Rate on Defaults

0

10

20

30

40

50

60

70

Axis

Titl

e

Base Case Severity Rate Actual Severity Rate

Strength of Structure

0102030405060708090

100

Axis

Titl

e

Credit Enhancement Standish Break-even Default Rate

Appendix

Sample Model Output – Auto ABS

Name: 2010 Vintage Subprime Auto ABS C TrancheRating: Aaa/AAA/NROriginal Face: 79,308,000Current Face: 79,308,000Tranche Factor: 1.0000Coupon/Coupon Type: 5.19% FixedCollateral Description: SubPrimeStructure: Sequential Pay

Delinquency Performance Summary:

Collat Group

Month WALA 30 60 90+Total 60+

DQ1M CDR 1M ABS 1M Severity Cum Loss CE

CE/Cum Loss

CoverageALL J an-13 43 8.7% 1.5% 0.4% 1.8% 6.79 1.08 45.3% 5.14% 46.0% 9.0ALL Dec-12 42 7.4% 1.3% 0.3% 1.6% 7.13 1.21 46.2% 5.07% 45.0% 8.9ALL Nov-12 41 7.6% 1.2% 0.3% 1.5% 8.81 1.29 56.9% 4.99% 44.0% 8.8

Collateral Summary:

FICO New UsedOrig Loan

BalAPR

Orig WAM at Issuance

Seasoning at Issuance

Orig Term 0-60mos

State1 State2

590 31.3% 68.7% 14,341 18.23% 68.0 8.0 30.0% TX: 18.6% CA: 10.3%

Modeling Assumptions:Pool Loss Proj (Loss to Liquidation): 7.0%Pool Loss Proj (Base Case): 6.6%Prepayment Curve: 1 ABSDefault Curve: 8 CDRSeverity 60%


Appendix

Sample Model Output – Auto ABS


Scenario Results:

Price Yield ABS Default Severity WAL (Yrs)Window Start

Window End

Pool Default%

Pool Loss%Bond

Writedown$

Bond Writedown

%Base $103.95 1.0% 1 abs 8cdr 60% 1.0 J un-13 Aug-14 8.1% 6.4% $0 0.0%Stress $104.18 1.0% 0.8 abs 9.6cdr 70% 1.0 J ul-13 Sep-14 10.3% 7.1% $0 0.0%Best $103.62 1.0% 1.2 abs 6.4cdr 50% 0.9 J un-13 J un-14 5.8% 5.9% $0 0.0%Base-Call $103.86 1.0% 1 abs 8cdr 60% 0.9 J un-13 May-14 7.4% 6.3% $0 0.0%

Class Break Loss (% current bal): 48.1% Break Loss CDR: 90.1Break loss %/ Base loss%: 9.9x Break loss CDR/ 3mo avg CDR: 11.9x

Appendix

CMBS Cash Flow Modeling Process

Standish’s CMBS modeling process is a comprehensive approach that utilizes a combination of structural and loan-level analysis. Its process is dynamic and continuously calibrated to consider the effects of property income, refinancing and modification options, and servicer/special servicer behavior. Highlights of our process include:

Default Propensity− MSA and property type specific NOI vectors, cap rate assumptions, and

refinance requirements determine involuntary term defaults and balloon extensions

− Factor adjustments for modification and servicer behavior Loss Severity

− Customized default timing and severity expectations based on vintage and status

− Calibrated for modification and servicer/special servicer behavior− Dynamic collateral loss severity, formulated through capital markets refinance

methods Voluntary Prepayments

− Call protection and voluntary prepayments− Evolution of cap rates− Term structure of interest rates, yield curve shape, and volatility

Other− Trepp used as primary cash flow engine− Other structural features including credit enhancement, transaction triggers,

covenants and other factors− Utilize third party and internally developed research to analyze collateral at a

granular level− A multi-scenario approach to evaluate risk across a range of probable

outcomes

Source: Trepp as of February 2013. This case study is representative of a type of CMBS investments owned and managed in client portfolios, and highlights the fundamental drivers of our investment process.


CMBS Case Study: 2005 Vintage AJ Tranche

● This is a typical 2005 deal with three tiers of original "AAA" bonds; 30% "last cash flow", 20% "AM/A4B", and 13.6% "AJ”.

● Deal losses have accumulated to 2.2% of original balance, typical for a 2005 vintage deal. ● Paydowns, amortization and liquidations have increased AJ credit enhancement over time. ● Appraisal reductions to limit advances, and coupon modifications have caused interest shortfalls that

are affecting up to class J.

Collateral Analysis Deal Structure

Property Type Feb '13 Aug '05 Tranche CouponBalanceOriginal

BalanceCurrent Feb '13

Factor Feb '13 Orig S/F

Current S/F Feb '13

Cum Bond Loss

Amt Feb '13

Accum IntShortfall Feb '13

Credit Enhancem

entSecur

Credit Enhancem

entCurrent Feb '13

Retail 31.9 35.2 A1 4.6 121,200,000 0 - AAA/AAA NR/PIF 0 0 20.0 22.9 Office 26.9 23.3 A2A 4.9 294,875,000 74,547,016 0.25 AAA/AAA AAA/AAA 0 0 30.0 50.7 Mixed Use 17.0 15.3 A2B 4.9 42,125,000 42,125,000 1.00 AAA/AAA AAA/AAA 0 0 20.0 22.9 Self Storage 8.7 8.2 AAB 5.0 111,100,000 49,271,000 0.44 AAA/AAA AAA/AAA 0 0 20.0 22.9 Multi-Family 6.0 11.2 A3 5.4 103,000,000 103,000,000 1.00 AAA/AAA AAA/AAA 0 0 20.0 22.9 Lodging 1.9 3.9 A4A 5.0 1,060,595,000 1,060,595,000 1.00 AAA/AAA AAA/AAA 0 0 30.0 32.5 Industrial 2.1 2.8 A4B 5.0 151,514,000 151,514,000 1.00 AAA/AAA A+/AAA 0 0 20.0 22.9 Other 0.1 0.1 A1A 4.9 318,834,000 171,133,282 0.54 AAA/AAA A+/AAA 0 0 20.0 22.9 Defeased 5.3 - AJ 5.1 175,571,000 175,571,000 1.00 AAA/AAA BBB-/A 0 0 13.6 14.7

B 5.2 24,098,000 24,098,000 1.00 AA+/AA+ BB+/BBB 0 0 12.8 13.5 Amortization Type Feb '13 Aug '05 C 5.2 34,425,000 34,425,000 1.00 AA/AA BB/BBB- 0 0 11.5 11.9 Amortiznig Balloon 39.8 41.6 D 5.2 27,541,000 27,541,000 1.00 AA-/AA- BB-/BB 0 0 10.5 10.6 Full I/O 42.7 41 E 5.2 24,098,000 24,098,000 1.00 A+/A+ B+/B 0 0 9.6 9.5 Partial I/O 17.5 17.4 F 5.3 27,541,000 27,541,000 1.00 A/A B/CCC 0 0 8.6 8.2

G 5.4 27,540,000 27,540,000 1.00 A-/A- B-/CCC 0 0 7.6 6.9 State Feb '13 Aug '05 H WAC 34,426,000 34,426,000 1.00 BBB+/BBB+ CCC/CCC 0 0 6.4 5.3 NY 35.3 31.6 J WAC 30,983,000 30,983,000 1.00 BBB/BBB CCC-/CCC 0 157,464 5.3 3.9 CA 15.4 14.3 K WAC 41,311,000 41,311,000 1.00 BBB-/BBB- D/CC 0 2,356,480 3.8 2.0 FL 7.2 7.9 L 4.8 10,327,000 10,327,000 1.00 BB+/BB+ D/C 0 1,186,951 3.4 1.5 TX 6.6 6.2 M 4.8 10,328,000 10,328,000 1.00 BB/BB D/C 0 1,187,066 3.0 1.0 NM 5.7 5.4 N 4.8 17,213,000 17,213,000 1.00 BB-/BB- D/C 0 1,990,043 2.4 0.2

O 4.8 3,442,000 3,442,000 1.00 B+/B+ D/C 0 409,254 2.3 0.0 Credit Stats Feb '13 Aug '05 P 4.8 10,328,000 614,158 0.06 B/B D/D 9,713,842 1,083,827 1.9 - LTV 86.3 71.5 Q 4.8 10,328,000 0 - B-/B- D/D 10,328,000 710,382 1.5 - DSCR 1.31 1.46 S 4.8 41,311,199 0 - NR/NR -/NR 41,311,199 1,846,027 - -

2.2%

Appendix

CMBS Case Study: 2005 Vintage AJ Tranche Performance Trends

Since purchase:● Monthly losses have been trending down

● Total deal losses have been rising more slowly than prepayment, resulting in improved enhancement metrics.

● DQ/SS, modified and servicer watchlist exposure have all slowly trended down, resulting in an improved outlook.Source: Trepp as of February 2013. This case study is representative of a type of CMBS investments owned and managed in client portfolios, and highlights the fundamental

drivers of our investment process.

0

5

10

15

20

25

0

10

20

30

40

50

Collateral on Servicer Watchlist (L axis)Deal Losses (R axis)DQ + SS (R axis)Modified (R axis)

Apr '12 Standish buys from CDO

Appendix

CMBS Case Study: 2005 Vintage AJ Tranche Modeling Assumptions

● Modified “hopes notes” are assumed to be written off at maturity● Large non-performing loans and performing but specially serviced loans are assumed to be

modified with 10% loss, 10% paydown and 2 year extension with 20% severity.● Medium to small non-performance loans and performing but specially serviced loans are

assumed to be liquidated within a 18 months horizon with 50% severity.● Always performing loans are assumed to default if Debt Service Cover Ratio (DSCR) is less

than 0.95, with a loss severity dependant on property value and remaining balance. ● Currently performing and not specially serviced loans are projected to extend if estimated

refinancing proceeds are less than the balance at maturity.Source: Trepp as of February 2013. This case study is representative of a type of CMBS investments owned and managed in client portfolios, and highlights the fundamental drivers of our investment process.

Sample Model Output - Conduit CMBS

Name: 2005 Vintage AJ TrancheRating: BBB-/AOrig Face:Current Face:TrancheFactor: 1.00Coupon/Type: 5.073% fixedCollateral Description: Fixed rate Conduit CMBSStructure: Sequential

Scenario2yr NOI Growth Rates

Post 2 yr Growth % DSCR LTV

Loan Spread to 10 yr Ave DSCR LTV

Loan Spread to 10 yr Ave

Cap Rate Change/yr

for 4 yrsMonths to

DefaultMonths to

ExtendBase MSA/Property Type specific 2% 1.25 70 0 1.30 65 0.00% -0.25% 12 18Worst MSA/Property Type specific 0% 1.30 65 0.50% 1.40 60 0.50% 0.50% 12 18Best MSA/Property Type specific 3% 1.20 75 -0.50% 1.25 70 -0.50% -0.50% 12 18

RT/OF/IN Apartment Refinance Terms

175,571,000 175,571,000

Source: Trepp as of February 2013. This case study is representative of a type of CMBS investments owned and managed in client portfolios, and highlights the fundamental drivers of our investment process.

* Purchased on 4/26/2012 at $98.2† Includes defeased loans and liquidating dq/ss/modified loans

Appendix

CMBS Case Study: 2005 Vintage AJ Tranche Modeling Output

● Price increase from $98.2 on 4/26/2012 to $104.5 on 2/15/2013.

● No loss expected, with expected remaining Credit Enhancement of at least 9%.

● Standish internal rating of A to AAA, signaling upgrade potential.

● Loss-adjusted yield to maturity from 3.50% to 3.80%.

Name: 2005 Vintage AJ TrancheRating: BBB-/AOrig Face:Current Face:TrancheFactor: 1Credit Enhancement 0.14656Coupon/Type: 5.073% fixedCollateral Description: Fixed rate Conduit CMBSStructure: Sequential

Scenario Results

Current Market Price* Yield WAL Window

Deal Loss Low C/E

Tranche Loss

Standish

Rating %

Performs % Defaults % Extends

% non subject to credit model†

Base 104.46875 0.03805 3.859 12/16-01/17 0.07 0.10496 0 AAA 0.51 6.79% 28.89% 0.13

Stress 104.46875 0.03816 3.894 01/17-01/17 0.10 0.09018 0.00% A 0.35 6.79% 45.38% 0.13

Best 104.46875 0.03546 3.178 07/15-12/16 0.06 0.11709 0.00% AAA 0.72 6.79% 8.27% 0.13

175,571,000 175,571,000

Appendix

Biography

Thomas Graf, CPA Tom is Managing Director and Senior Portfolio Manager for Global Securitized Strategies. He is responsible for overseeing Standish's securitized investments that include non-agency residential mortgage-backed (RMBS), commercial mortgage-backed (CMBS) and consumer asset-backed (ABS) securities. In addition, Tom leads Standish's Global Workout Solutions business, a fiduciary advisor service for institutions holding distressed and illiquid assets. Tom joined Standish in 2008 from Gulf Stream Structured Advisors, where he was Chief Investment Officer and Senior Portfolio Manager. Prior to joining Gulf Stream in 2006, Tom was Director of Securitized Products and Senior Portfolio Manager for Wachovia Corporation. At Wachovia Tom actively managed over $16 billion of non-agency securitized investments that were part of total return and interest rate risk management strategies. Prior to joining Wachovia in 1992, Tom was a certified public accountant for both Price Waterhouse and KPMG. Tom holds a B.S. degree from The University of Akron. He has 26 years of combined finance and investment management experience.

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