Michael GerdesSenior Vice President, Moody’s Investors Services

Chris StevensVice President and Director, TD Securities

Sponsored by

CMBS 301®Bond Pricing & Structuring

October 15, 2007Hilton Toronto

Overview

CMBS Market SnapshotAAA Structural EvolutionStructural/Execution Analysis: Schooner 2007-8CMBS Default StudiesSpread History

Canadian CMBS Originations

Source: TD Securities

-

1,000

2,000

3,000

4,000

5,000

6,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 YTD

CAD $MM

Changes in U.S. CMBS Collateral Composition

% Bn

Source: Morgan Stanley, Trepp LLC

57

74

47

67

52

78

93

138

162 164

0

10

20

30

40

50

60

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 YTD0

20

40

60

80

100

120

140

160

180

U.S. CMBS Issuance AAA Subordination Percentage of Full IO Percentage of 5- and 7-Year Loans

CMBS AAA/Aaa Structural Evolution

Standard U.S. CMBS AAA/Aaa StructureSuper Duper Senior = Most enhanced AAA class; typically 30% credit enhancement

Super Senior = Mezzanine AAA class; typically 20% credit enhancement

Junior = Most subordinated AAA class; typically 12% - 15% credit enhancement (as determined by the rating agencies)

Class A-1A: Multifamily directed classClass A-AB: Amortizing bond

Standard U.S. CMBS AAA/Aaa WaterfallPrior to write down of Class A-M principal is paid sequentially to the Super Duper Senior classes

After write down of Class A-M principal is paid pro rata to all outstanding Super Duper Senior classes

After to complete write down of Class A-MAfter to complete write down of Class A-M

Not to Scale

Prior to complete write down of Class A-MPrior to complete write down of Class A-M

A-1 Interest A-2 Interest A-3 Interest A-AB Interest

A-4 Interest

A-M Principal

A-AB Scheduled Principal

A-1 Principal

A-2 Principal

A-3 Principal

A-AB Principal

A-4 Principal

A-M Interest

Not to Scale

A-1 Interest A-2 Interest A-3 Interest A-AB Interest

A-4 Interest

A-1 Principal

A-2 Principal

A-3 Principal

A-AB Principal

A-4 Principal

Collateral Characteristics and Curves

Source: TD Securities

Prepayment Conventions: CPR vs. CPY vs. CPP

Prepayment Conventions

CPR: prepayments begin after contractual lockout

CPY: prepayments begin after contractual lockout and yield maintenance period, if any

CPP: prepayments begin after contractual lockout, yield maintenance period and fixed penalty period, if any

‘100 CPY’ assumes the loan prepays in full after the lockout period and YM period

0

2,500,000

5,000,000

7,500,000

10,000,000

1 8 15 22 29 36 43 50 57 64 71 78 85 92 99 106 113 120

Loan Assumption: 36 months lockout; 81 months yield maintenance; 3 months open

100 CPR 100 CPY

Yield MaintenanceLockout Open

Standard Conduit Structure: Time Tranched Super Senior AAA classes; PAC & Companion IOs

Rating agencies determine capital structure; Investors determine dollar prices and spread

The interpolated swap rate or GOC yield plus the spread determines the yield on the investment grade bonds

The interpolated GOC yield plus the spread determines the yield on the below investment grade and interest-only bonds

On bond execution the deal is losing money; however, hedging results in a profit for the deal

The Economics:IG Bonds Sold: $498.1MMIG Proceeds: $492.3MMLoss IG Bonds: ($5.8)MMBIG Bonds Sold: $20.1MMBIG Proceeds: $13.5MM

Loss BIG Bonds: ($6.6)MMGain/Loss: ($12.4)MMIO Proceeds: $1.6MMGross Trade: ($10.7)MM

Source: TD Securities

CMBS HedgingTo protect against interest rate movements between origination and securitization, issuers hedgeHedges can include swaps, bond forwards, etcHedges perform opposite to the mortgage portfolioFor example, if rates rise, CMBS execution proceeds decline, but the hedge would increase in valueThe transaction would be effectively insulated from interest rate (not spread) changes

Levered (Companion) & PAC I0 Structure

Excess Interest between the collateral WAC and fixed rate bond coupons is paid to the IO holders

This excess interest is further divided into a levered (companion) and PAC IO

In this example, Class XC is the Levered (Companion) IO

Class XP is the PAC IO

Stepped PAC IO Structure

The PAC IO is sized to prepayment and default stresses

The PAC IO provides more default protection when mortgages are more likely to default and prepayment protection when mortgages are more likely to prepay

Stepped PAC IO Notional

Standard Conduit Structure: Base Case Investment Grade Bond Spreads plus 3 bps

Assumes investment grade bond spreads widen 3 basis points

More coupon is directed to investment grade bonds

Less coupon is available to the IO bonds resulting in reduced IO proceeds

However, since coupons are capped, there is no redirection of coupon flows

The Economics:IG Bonds Sold: $498.1MMIG Proceeds: $491.3MMLoss IG Bonds: ($6.8)MMBIG Bonds Sold: $20.1MMBIG Proceeds: $13.5MM

Loss BIG Bonds: ($6.6)MMGain/Loss: ($13.3)MMIO Proceeds: $1.6MMGross Trade: ($11.7)MM

Source: TD Securities

Standard Conduit Structure: Base Case Below Investment Grade Bond Spreads plus 25 bps

Assumes below investment grade bond spreads widen 25 basis points

Below investment grade bond coupon is constant at 10 year Treasury plus 50 bps

Higher yield reduces below investment grade proceeds

The Economics:

IG Bonds Sold: $498.1MM

IG Proceeds: $492.3MM

Loss IG Bonds: ($5.8)MM

BIG Bonds Sold: $20.1MM

BIG Proceeds: $13.3MM Loss BIG Bonds: ($6.8)MM

Gain/Loss: ($12.6)MM

IO Proceeds: $1.65MM

Gross Trade: ($10.9)MM

Source: TD Securities

Standard Conduit Structure: Base Case Investment Grade Bond Subordination Levels 1% Higher

Assumes investment grade bond subordination levels increase 1%

Price less AAA bonds at tight spreads

Price more BB+ bonds at wide spreads; lowers overall proceeds

The Economics:

IG Bonds Sold: $492.9MM

IG Proceeds: $487.2MM

Loss IG Bonds: ($5.7)MM

BIG Bonds Sold: $25.3MM

BIG Proceeds: $18.1MM Loss BIG Bonds: ($7.1)MM

Gain/Loss: ($12.8)MM

IO Proceeds: $1.65MM

Gross Trade: ($11.2)MM

Source: TD Securities

Execution Summary

Commercial Mortgage Defaults: 30 Years of History

ELS Study:

Esaki, L’Heureux, Snyderman (“ELS”) Study (1999, updated in 2002)Tracked U.S. insurance company commercial mortgage defaults from 1972-200216,595 loansPeak years for defaults were years 3 to 7 after origination – no pattern of higher defaults in balloon years

Commercial Mortgage Defaults: 30 Years of History

ELS Study continued:

Average cumulative lifetime default rate for 10-year origination cohorts was 18.4%Worst cohort (1986) experienced an average cumulative lifetime default rate of 31.6%About 59% of the defaulted loans were liquidated, 40% were restructured, and 1% experienced full recoveryAverage loss severity on liquidated loans was 31%

Commercial Mortgage Defaults: 30 Years of History

ELS Study continued:

Average loss rate = 18.4% x [(59% x 31%) + (40% x 16.5%) + (1% x 0%)] = 4.58%Current Baa2 conduit subordination levels average 5.0%Worst cohort (1986) average loss rate of 8.7%Current Aa2 and A2 conduit subordination levels of 11.25% and 8.75%

Moody’s – Lehman Brothers Study (2004)

1,870 U.S. CMBS loans with a cut-off balance of $10BAverage default rate of 4% (loans 90+ days past due) Average loss severity of 37.6% on cut-off balance and 41% on current balanceExpected loss = 4% x 37.6% = 1.50%Current B2 conduit subordination levels average 1.875%

Avg. U.S. Conduit Capital Structure: vs. ELS Study

Based on the average ELS experience, the current Baa2 bonds would not experience losses

Based on the experience of the worst origination cohort, the current Baa2 would experience losses

Source Morgan Stanley, Moody’s

Canadian Commercial Mortgage Default Study - Fitch

Fitch study – Oct 19985,654 Canadian commercial real estate loans ($10.7B)

Originated between 1982 – 1996Defaulted loans equaled 8%Cumulative losses were $181MM, or 2% of total origination balance Worst year – 1987 – 27% of that year’s originations defaulted

Average Canadian Conduit Capital Structure vs. Fitch Study

Based on the average Fitch experience over this stressed period, the current BBB bonds would not experience losses

Based on the experience of the worst origination cohort, the current BBB would experience losses

Fitch considers this period to be an “A” stress scenario

US CMBS Ratings Actions

Source Morgan Stanley, Fitch, Moody’s, Standard & Poor’s, Trepp LLC

Over the past seven years the ratio of upgrades vs. downgrades has averaged 7.5 to 1 263

395

629517

862

1337

1768

3037

2086

27 61 50

356481 414

292207 163

0

500

1000

1500

2000

2500

3000

3500

1999 2000 2001 2002 2003 2004 2005 2006 2007

Upgrades Dow ngrades

1999 2000 2001 2002 2003 2004 2005 2006 2007 YTDCMBS 9.7 : 1 6.5 : 1 12.6 : 1 1.5 : 1 1.8 : 1 3.2 : 1 5.0 : 1 15.0 : 1 14.0 : 1

Upgrade/Downgrade Ratio

YTDDowngrades

US 10-Year AAA CMBS Spreads to Swaps

AAA CMBS had consistently traded within an approximate 10 bp trading range since the spring of 1999 through fall of 2003

Stress Periods Result from Supply and Demand ImbalanceDecember 1997–September 2007 (1)—Spread (bp)

Source: M organ Stanley, Cit icorp

0

20

40

60

80

100

120

12/16/97 1/11/99 1/21/00 2/28/01 3/20/02 3/26/03 4/14/04 5/25/05 5/26/06 6/15/07

LTCM Shock and Aftermath

PreshockTrading Range

Post-9/11

Post-Shock Trading Range

Liquidity Crisis

Canadian 10-Year AAA CMBS Spreads to GOC

30

40

50

60

70

80

90

100

110

120

11/1/

1998

5/1/19

9911

/1/19

995/1

/2000

11/1/

2000

5/1/20

0111

/1/20

015/1

/2002

11/1/

2002

5/1/20

0311

/1/20

035/1

/2004

11/1/

2004

5/1/20

0511

/1/20

055/1

/2006

11/1/

2006

5/1/20

07

300

500

700

900

10y AAA SpreadTSX 60

10Y

AA

A C

MB

S Sp

read

S&P

/ TSX

60

Inde

x

Post 9/11

Stress Periods Results from Supply and Demand ImbalanceNovember 1998 - September 2007Spread in bps

Liquidity Crisis

Non-Investment Grade CMBS Spreads to UST

Bids for BB’s come from credit buyers & CDO’s

Unrated yields remain 20% to 23% nominal – mid to high teens loss adjusted

Canadian CMBS 10- Year BB and B spreads to Canada’s are 400 and 800, respectively

Source: Morgan Stanley, Citicorp

0

200

400

600

800

1,000

1,200

1/9/98 9/11/98 5/17/99 1/10/00 9/27/00 5/30/01 1/30/02 10/2/02 6/4/03 2/11/04 10/20/04 6/22/05 2/17/06 10/20/06 6/22/07

BB 10-Year B 10-Year

Spread (bp) to UST