the cdo strategist

18
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 The CDO Strategist US CDO Strategy, Insight & Market Recap Structured Products • Americas Issue #73 Strategy Decomposing Leveraged Loan Spread In this section, we decompose leveraged loan spread into taxes, default losses, liquidity premium and economic policy uncertainty. Based on our analysis, we found that the current leveraged loan spread is too wide relative to expected default losses, and the elevated excess spread is mainly driven by high uncertainty regarding economic policies. Insight CLO Market Recap – Month of July Second quarter earnings so far turned out to be generally in line with already- lowered expectation, with limited improvement on revenue growth. However, the market seems to have regained its footing given recent positive developments regarding the European debt crisis, especially ECB President Mr. Mario Draghi’s “whatever it takes” speech, brushing aside for now increasing signs of a possible hard landing in emerging economies and the impending “fiscal cliff” in the US. At this point, the markets seem to have priced in a high probability of another round of quantitative easing (or QE3). U.S. CLOs performed well – especially at the bottom part of the capital structure. In the secondary market, BBB tranches saw a monthly total return of 4.5%, while CLO equities of 2005-2008 vintages on average enjoyed a total return of 5.6% on the month. We saw a slowdown on the new-issue front in July, given the usual slow summer season. Total monthly issuance dropped from $4.1bn in June to $1.8bn, bringing the YTD total tally to $20.4bn. In addition, the issuance was dominated by middle market loan (MML) CLOs, with three out of the five deals being MML transactions. In the meantime, the new-issue spreads remain wide, with AAA primary spreads around 150bps to 155bps, and BBB spreads from 625bps to 650bps. Finally, we took a look at how fast existing CLOs – especially those issued in 2008 and earlier – have been paying down due to either amortization or liquidation/call by equity holders, compared with the amount of new-issue CLOs. 31 July 2012 Fixed Income Research http://www.credit-suisse.com/researchandanalytics Contributors David Yan +1 212 325 5792 [email protected] Table of Contents Strategy Decomposing Leveraged Loan Spread ................................... ..……2 Insight CLO Market Recap – Month of July .......................................... ..……9 US CLO Market Update............... ..11 Appendix: Select CDO Research Reports…………………….. ............. 14

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Page 1: The CDO Strategist

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

The CDO Strategist US CDO Strategy, Insight & Market Recap

Structured Products • Americas Issue #73

Strategy

Decomposing Leveraged Loan Spread In this section, we decompose leveraged loan spread into taxes, default losses, liquidity premium and economic policy uncertainty. Based on our analysis, we found that the current leveraged loan spread is too wide relative to expected default losses, and the elevated excess spread is mainly driven by high uncertainty regarding economic policies.

Insight

CLO Market Recap – Month of July Second quarter earnings so far turned out to be generally in line with already-lowered expectation, with limited improvement on revenue growth. However, the market seems to have regained its footing given recent positive developments regarding the European debt crisis, especially ECB President Mr. Mario Draghi’s “whatever it takes” speech, brushing aside for now increasing signs of a possible hard landing in emerging economies and the impending “fiscal cliff” in the US. At this point, the markets seem to have priced in a high probability of another round of quantitative easing (or QE3).

U.S. CLOs performed well – especially at the bottom part of the capital structure. In the secondary market, BBB tranches saw a monthly total return of 4.5%, while CLO equities of 2005-2008 vintages on average enjoyed a total return of 5.6% on the month.

We saw a slowdown on the new-issue front in July, given the usual slow summer season. Total monthly issuance dropped from $4.1bn in June to $1.8bn, bringing the YTD total tally to $20.4bn. In addition, the issuance was dominated by middle market loan (MML) CLOs, with three out of the five deals being MML transactions. In the meantime, the new-issue spreads remain wide, with AAA primary spreads around 150bps to 155bps, and BBB spreads from 625bps to 650bps.

Finally, we took a look at how fast existing CLOs – especially those issued in 2008 and earlier – have been paying down due to either amortization or liquidation/call by equity holders, compared with the amount of new-issue CLOs.

31 July 2012Fixed Income Research

http://www.credit-suisse.com/researchandanalytics

Contributors

David Yan+1 212 325 5792

[email protected]

Table of Contents Error! Reference source not found. Error! Reference source not found. . ..……Error! Bookmark not defined. In this section, we decompose leveraged loan spread into taxes, default losses, liquidity premium and economic policy uncertainty. Based on our analysis, we found that the current leveraged loan spread is too wide relative to expected default losses, and the elevated excess spread is mainly

Table of Contents Error! Reference source not found. Error! Reference source not found. . ..……Error! Bookmark not defined. In this section, we decompose leveraged loan spread into taxes, default losses, liquidity premium and economic policy uncertainty. Based on our analysis, we found that the current leveraged loan spread is too wide relative to expected default losses, and the elevated excess spread is mainly

Table of Contents Strategy Decomposing Leveraged Loan Spread ................................... ..……2 Insight CLO Market Recap – Month of July .......................................... ..……9 US CLO Market Update ............... ..11

Appendix: Select CDO Research Reports…………………….. ............. 14

Page 2: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 2

Strategy Decomposing Leveraged Loan Spread In this section, we decompose leveraged loan spread into taxes, default losses, liquidity premium and economic policy uncertainty. Based on our analysis, we found that the current leveraged loan spread is too wide relative to expected default losses, and the elevated excess spread is mainly driven by high uncertainty regarding economic policies.

Leveraged loan credit spread versus default loss It has been well documented that the spreads on corporate bonds tend to be much higher than what’s “justified” by expected default losses. 1 Most of these studies focused on examining and explaining the differences (i.e., the spread) between the rates offered on corporate bonds and those offered on government bonds. Some of the commonly discussed components of the spreads include: expected default loss, tax premium, liquidity premium, and risk premium.

The tax premium exists because interest payments on corporate bonds are taxed at the state level whereas interest payments on government bonds are not. For example, taking account of the deduction of state taxes from federal tax, Elton et al (2001) use a benchmark tax rate of 4.875% to find that taxes can account for 28%-73% of spreads depending on rating and maturity.2

However, our focus in this report is on leveraged loans, which typically pay a floating rate coupon based on the 3-month LIBOR rate and reset quarterly. The nominal margin (also called reference margin) over the LIBOR simply represents how much the borrower promises to pay the lender or investor of the loan each quarter. However, due to other factors – which are the focus of our report – the loan could be valued above, below, or at par. The spread, which is often called a discount margin (DM), is a spread over the LIBOR rates, at which the price of the loan equates the present value of future cash flows of the loan. The discount margin can be calculated to maturity or to an earlier date assuming the loan will be prepaid. Because loans are callable with little to no penalties, it is standard to use a 3-year discount margin, which is the “spread” we use throughout this report.3

For our purpose, we will just “take” the 4.875% tax rate from Elton et al (2001) to calculate the component related to tax. For example, if the loan DM is 300bps, we will derive that roughly 15bps is related to tax.4

More importantly, we want to know how much of the spread (i.e., DM) accounts for default loss, for leveraged loans.

Our sample data include: 1) historical 3-year leveraged loan discount margin (DM) based on Credit Suisse Leveraged Loan Index; 2) trailing-12-month (TTM) loan default rates from Moody’s; and 3) historical loan recovery rate from both Moody’s and Credit Suisse. We show the data in both Exhibit 1 and Exhibit 2.

1 There is a long list of academic papers on this subject. A select short list includes: Elton, Gruber, Agrawal, and Mann (2001): Explaining the Rate Spread on Corporate Bonds, Journal of Finance; Driessen (2003): Is default event risk priced in corporate bonds?, mimeo, University of Amsterdam; Amato and Remolona (2003): The credit spread puzzle, BIS Quarterly Review, December 2003. 2 Elton, Gruber, Agrawal, and Mann (2001): Explaining the Rate Spread on Corporate Bonds, Journal of Finance. 3 In the Credit Suisse Leveraged Loan Index, the discount margin is calculated as the yield-to-refunding of the facility less the current 3-month Libor rate. We compute the yield-to-refunding by modeling the facility as a fixed-rate quarterly-pay bullet bond where price is the current price of the facility; coupon is the stated spread of the facility plus the current 3-month Libor rate, or, if the facility has a Libor floor, the stated spread plus the larger of either the current 3-month Libor rate or the Libor floor; and maturity is set either to a fixed number of years from the end date of the measurement period or to the maturity of the facility. 4 We are essentially assuming the same tax rate is applied to the "LIBOR component" of investment income.

Page 3: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 3

One important observation from Exhibit 1 is that loan spreads tend to lead realized default rates, which makes sense because: 1) the spread should theoretically reflect investors’ expectations on future default risk; and 2) the nature of the TTM default rate also makes it a lagging indicator. The lead time seems to be between six to ten months. For our discussion later, we will use a ten-month lead time.

Exhibit 1: Leveraged loan DM vs. default rate* Exhibit 2: Loan default rate and recovery rate*

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Source: Credit Suisse, Moody’s * As of June 29, 2012

Source: Credit Suisse, Moody’s * As of June 29, 2012

In order to estimate the share of loan spreads responsible for default loss, we conduct the following steps of calculations:

1) Exclude the tax component from the loan spread (DM) based on a tax rate of 4.875%;

2) Calculate a one-year realized default loss rate by multiplying Moody’s TTM default rate by the average recovery rate of the previous 12 months. Exhibit 3 plots the realized loss rate against the 3-year DM, and, as expected, we see the spread/DM leading the loss rate;

Exhibit 3: Leveraged loan DM vs. one-year realized loss rate*

Exhibit 4: Net spread/DM after accounting for tax and realized default loss, and % of spread compensates for realized loss*

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Source: Credit Suisse, Moody’s * As of June 29, 2012

Source: Credit Suisse, Moody’s * Given that we are assuming a ten-month lag, the latest data point is as of August, 2011

Page 4: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 4

3) Subtract the realized loss rate of ten months ago from the remaining spread (excluding tax) from Step 1 – in other words, we are assuming a ten-month lead time of the spread to the realized loss rate, and also express the realized loss as a percentage of the spread excluding tax, which shows how much of the spread compensates investors for the realized losses. Both are shown in Exhibit 4. There are several interesting observations from this chart, which include: 1) during stressful times, such as both the 1999-2002 recession and the 2008-2009 recession/credit crisis, roughly 50%-60% of the credit spread or DM compensated investors for future (ten months later) realized losses; 2) during normal or benign credit environment, less than 20% of the credit spread is related to default losses; 3) even after excluding tax and realized losses, there is still a significant “excess” spread remaining, and it could be very volatile – as high as 1200bps during late 2008, as shown in Exhibit 4.

Because we assume a ten-month lead time of spread to the realized losses, we can actually use Moody’s projected TTM default rates for the period from July 2012 to June 2013 to calculate the level of spreads of the period from September 2011 to June 2012 that are consistent with the projected or expected default losses, and in turn the excess loan spread.

As shown in Exhibit 5, based on Moody’s baseline TTM default rate projections for the next 12 months, we estimate that, after accounting for tax and projected default rates, currently there is still around 485bps of excess loan spread under the base case, and around 295bps excess spread under the pessimistic case.5

Exhibit 5: Excess credit spreads based on Moody’s baseline and pessimistic default projections*

Exhibit 6: LIBOR-OIS spread vs. excess credit spread excluding tax and realized default loss

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Liquidity: LIBOR-OIS (right axis)

Source: Credit Suisse, Moody’s * Using a 70% recovery rate

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

5 Moody's pessimistic projected default rate will start from 3.58% for July 2012 and end with 10.31% for June 2013.

Page 5: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 5

Loan spread vs. liquidity premium The next question then is: what causes the “excess spread” or the “risk premium” as some people usually call it?

To some this is the most “puzzling” part of the credit spread, and much research and analysis have been done on corporate bond spreads.

One explanation for the risk premium is the so-called liquidity premium. Generally speaking, investment grade corporate bonds are more liquid than high yield bonds, which in turn are more liquid than loans, though liquidity in the loan market has been improving.

Common measures of liquidity include bid-ask spread and size of the market, however, for our analysis, we use the so-called LIBOR-OIS spread as a proxy for overall liquidity in the financial markets.6

Exhibit 6 plots the excess loan spread against the LIBOR-OIS spread. As shown, during the 2008-2009 credit and liquidity crisis, the LIBOR-OIS spread skyrocketed to almost 250bps as the liquidity in the entire financial system dried up, in sync with the spike in the excess loan spread. Clearly, the excess spread is partially driven by the overall liquidity condition, and thus there should be a liquidity component in the excess loan spread. As shown in the Appendix, a regression of LIBOR-OIS (the X variable) over the excess spread (the Y variable) has an R-square statistics of 0.35 (Exhibit 11) – i.e., about 35% of the change in the excess spread could be explained by the LIBOR-OIS spread as a liquidity factor.

How about the remaining 65%? Especially, if we take a closer look at Exhibit 6, after mid-2009, as the liquidity crisis ended, the LIBOR-OIS spread dropped to pre-crisis levels, but the excess loan spread did not – it hovers around the 400bps to 600bps range, versus 200bps to 400bps before the crisis.

Clearly, there is something still missing……

Loan spread vs. economic policy uncertainty Fortunately, a measure of overall economic policy uncertainty developed by several researchers at Stanford University and University of Chicago7 has been brought to our attention.

To measure policy-related economic uncertainty, they constructed an index from three types of underlying components. One component quantifies newspaper coverage of policy related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty.8

Exhibit 7 shows a plot of the Economic Policy Uncertainty Index (EPUI) against the excess loan spread. As we can see, since 2008, economic policy uncertainty has averaged about twice the level of the previous ten years. As a result, the EPUI “fits” the excess spread well – as shown in Exhibit 12, a regression of the EPUI on the excess spread has a R-square statistics of 0.61 – or about 61% of the change in the excess spread could be explained by the EPUI. Most importantly, as measured by EPUI, despite the ending of the great recession and credit crisis after 2009, the uncertainty level of US economic policies remains elevated, which is the main driver for the loan credit spread to remain wide, in our view. 6 OIS stands for Overnight Indexed Swap, which is a fixed/floating interest rate swap with the floating leg computed using a published overnight rate index, which, in the case of USD, is the Fed Effective Rate. The LIBOR-OIS spread is the difference between the 3-month LIBOR and 3-month USD OIS, which is widely used as a proxy for market liquidity. 7 Scott R. Baker and Nicholas Bloom of Stanford University, and Steven J. Davis from University of Chicago. 8 For a detailed discussion of the index, please visit http://www.policyuncertainty.com/us_monthly.html

Page 6: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 6

We can combine the liquidity factor as measured by the LIBOR-OIS spread and the uncertainty factor as measured by EPUI to explain the excess loan spread, by using a multivariate regression, whose results are shown in Exhibit 13. Combined, the LIBOR-OIS spread and economic policy uncertainty can explain roughly 73% of the movements in the excess loan spread.

We can calculate the theoretical (i.e., “fitted”) excess spreads using the results of the regression, as shown in Exhibit 8.

Exhibit 7: Excess credit spread vs. Economic Policy Uncertainty Index

Exhibit 8: Theoretical (fitted) excess loan spread vs. actual excess loan spread

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Fitted LL (3-year)_DM_excl Tax&Default Loss

Source: Credit Suisse, Economic Policy Uncertainty Source: Credit Suisse

More importantly, we want to know what the theoretical excess spread should be, relative to the current default expectation, liquidity condition, and uncertainty level.

Exhibit 9 shows the LIBOR-OIS spread and EPUI from September 2011 to June 2012. As we can see, given a robust liquidity environment, the LIBOR-OIS spread has been grinding lower towards the 30bps range. However, since May 2012, the uncertainty level of economic policies has risen to elevated levels again, as the concern over the pending “fiscal cliff” grows and we move closer to the presidential election.

Using the regression results in Exhibit 13, we can estimate the excess loan spreads for the period from September 2011 to June 2012 that are consistent with the LIBOR-OIS spread and EPUI. We compare these estimated excess spreads with the excess spreads based on Moody’s baseline default rate projections (same as those shown in Exhibit 5) in Exhibit 10. Two interesting observations seem apparent: 1) the movement of our estimated excess spreads is very similar to that of the EPUI, suggesting that the rise in our estimated excess spread is mainly driven by the rise in uncertainty; 2) compared to the excess spreads based on the projected default rates, the estimated excess spread is much higher – which basically suggests that the current loan spread/DM of around 600bps, albeit more than sufficient to cover the expected default loss with an excess spread of close to 500bps, is actually too tight when factoring in the high uncertainty level regarding the economic policies.

Page 7: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 7

Exhibit 9: LIBOR-OIS & Economic Policy Uncertainty Index since September 2011

Exhibit 10: Theoretical (fitted) excess loan spread vs. excess loan spread based on default projection

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Source: Credit Suisse, Economic Policy Uncertainty, the BLOOMBERG PROFESSIONAL™ service

Source: Credit Suisse

Conclusions To sum up our findings in this section, our main conclusions are:

1) Historical evidence shows that only a portion – around 50%-60% during stressful times and below 20% during normal/benign times – of the loan credit spreads is to compensate investors for default losses;

2) Currently the leveraged loan spread, as measured by a 3-year DM with a current level around 600bps, seems to be too wide relative to expected default losses. The excess spread after factoring into tax and projected default losses remains at the similar elevated level since 2008, making it a good entry point for investing in leveraged loans, in our view;

3) We believe the heightened loan spreads are mainly driven by the high uncertainty level regarding the economic policies. And we expect the uncertainty level to drop as we move beyond the presidential election and into 2013.

Appendix Below are the results for regressing LIBOR-OIS spread on excess loan spread (i.e., the 3-year DM excluding tax and realized default losses):

Exhibit 11: Regression Results: Excess Spread = a + b*LIBOR-OIS + residual Sample Period: 12/2001 – 8/2011, R^2 = 0.36

Coefficients Standard Error t Stat P-value

Intercept 277.87 18.86 14.73 2.01E-28

LIBOR-OIS 3.0905 0.385 8.027 8.69E-13 Source: Credit Suisse

Below are the results for regressing EPUI on excess loan spread (i.e., the 3-year DM excluding tax and realized default losses):

Page 8: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 8

Exhibit 12: Regression Results: Excess Spread = a + b*EPUI + residual Sample Period: 10/1996 – 8/2011, R^2 = 0.61

Coefficients Standard Error t Stat P-value

Intercept -41.675 23.176 -1.798 0.07383

EPUI 3.363 0.2011 16.723 2.02E-38 Source: Credit Suisse

Below are the results for regressing the LIBOR-OIS spread and EPUI on excess loan spread (i.e., the 3-year DM excluding tax and realized default losses):

Exhibit 13: Regression Results: Excess Spread = a + b1*LIBOR-OIS + b2*EPUI + residual

Sample Period: 12/2001 – 8/2011, R^2 = 0.73 Coefficients Standard Error t Stat P-value

Intercept -54.325 29.41 -1.847 0.06732

LIBOR-OIS 1.766 0.2746 6.43 3.07E-09

EPUI 3.15 0.2546 12.38 8.06E-23 Source: Credit Suisse

Page 9: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 9

Insight CLO Market Recap – Month of July Second quarter earnings so far turned out to be generally in line with already-lowered expectations, with limited improvement on revenue growth. However, the market seems to have regained its footing given recent positive developments regarding the European debt crisis, especially ECB President Mr. Mario Draghi’s “whatever it takes” speech, brushing aside for now increasing signs of a possible hard landing in emerging economies and the impending “fiscal cliff” in the US. At this point, the markets seem to have priced in a high probability of another round of quantitative easing (or QE3).

Most risky assets rallied in July. For example, the S&P 500 Index was up by 1.68% and the CDX IG 5-year spread tightened by six basis points on the month (as of July 30th). U.S. CLOs also performed well – especially at the bottom part of the capital structure.

Among non-PIKable tranches, AAA CLO tranches remained flat or even widened by five bps on the month, while AA tranches performed better – tightened five to ten basis points to around 315bps-320 bps, from the 325bps-330bps range in June (Exhibit 14).

The lower part of the capital structure outperformed in July. Among PIKable tranches, BBB tranches saw the largest monthly rally – with generic prices moving from 70 cents on a dollar in June to 72-73 cents in July (Exhibit 15), or a monthly total return of 4.5% (including coupon proceeds). In addition, by our estimate, BB tranches delivered a monthly total return around 3.5%, followed by a 2.7% total return for single-A tranches.

Finally, CLO equities continued to generate attractive cash-on-cash returns – the average cash-on-cash yield for 2005-2008 vintage CLOs turned out to be around 36% (annualized) in July. With our CLO equity price index at 86.3, up from 83.8 of June, the total monthly return of 2005-2008 CLO equities reached 5.6%.

Exhibit 14: Generic secondary CLO spreads for non-PIKable tranches

Exhibit 15: Generic secondary CLO prices for PIKable tranches

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12

Feb-

12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

A BBB BB

Source: Credit Suisse

Source: Credit Suisse

Page 10: The CDO Strategist

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US CDO Strategy, Insight & Market Recap 10

We saw a slowdown on the new-issue front in July, given the usual slow summer season. Total monthly issuance dropped from $4.1bn in June to $1.8bn, but still higher than the $1.27bn issuance of last July. The YTD total tally now stands at $20.4bn. In addition, the issuance in July was dominated by middle market loan (MML) CLOs – three out of the five deals are MML transactions. In the meantime, the new-issue spreads remain wide, with AAA primary spreads around 150bps to 155bps, and BBB spreads from 625bps to 650bps.

Finally, we took a look at how fast existing CLOs – especially those issued in 2008 and earlier – have been paying down due to either amortization or liquidation/call by equity holders, compared with the amount of new-issue CLOs.

Exhibit 16 shows the percentage change of outstanding notionals of US CLOs by different groups of vintages. For example, in 2010, around 20% of the 2002-2004 vintage CLOs were paid down, around 40% in 2011 and around 27% in the first half of 2012, as those older vintages exit their reinvestment period and start amortizing. Similarly, the 2008 vintage CLOs have also experienced fast paydown – around 9% in 2010, 20% in 2011, and around 14% in the first half of 2012, as these deals tend to have higher funding costs and more likely to be called whenever possible. The 2005-2007 vintage CLOs have seen slower paydown, but the speed has picked up recently. In the first half this year alone, about 5% have been paid down, versus only 2% last year. In aggregate, the total outstanding size of 2002-2008 vintage CLOs declined by 7% in the first half.

That 7% drop is equivalent to around $16bn, as shown in Exhibit 17 (the blue bar). Interestingly, thanks to a dramatic increase in new CLO issuance, the net change (the gray bar) actually turned positive in the first half this year – first positive change since 2009. However, given our expectation that the paydown of older vintages, especially the 2005-2007 vintages, will accelerate, we believe that the total size of the CLO market will decline, unless the new-issue market can keep pumping at least $30bn of supply annually.

Exhibit 16: Change (%) of CLO outstanding notional by vintage*

Exhibit 17: Net change ($) of US CLO market*

As of 6/30/12 As of 6/30/12, in $bil

-5.1%-7.5% -7.0%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%2010 2011 Jun-12

2002-2004 Vintage

2005-2007 Vintage

2008 Vintage

2002-2008 Vintage Total

220.0

225.0

230.0

235.0

240.0

245.0

250.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2010 2011 Jun-12

2002-2008 Vintage YoY ChangeNew Issue (exclude MML deals)Net Change in CLO Market SizeTotal Outstanding (right axis)

Source: Credit Suisse, INTEX * Excluding middle market, market value and balance sheet CLOs

Source: Credit Suisse, INTEX * Excluding middle market, market value and balance sheet CLOs

Page 11: The CDO Strategist

31 July 2012

US CDO Strategy, Insight & Market Recap 11

US CLO Market Update9 Exhibit 18: New Issue CF CLO Equity IRR Tracker* Exhibit 19: Leveraged Loan vs. LCDX & CDX HY

6%

8%

10%

12%

14%

16%

18%

20%

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr-1

0M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1Ap

r-11

May

-11

Jun-

11Ju

l-11

Aug-

11Se

p-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr-1

2M

ay-1

2Ju

n-12

Jul-1

2

Pot

entia

l Zer

o D

efau

lt E

quity

IRR

for N

ew C

LOs

50556065707580859095

100105110

Jun-

08A

ug-0

8O

ct-0

8D

ec-0

8Fe

b-09

Apr

-09

Jun-

09A

ug-0

9O

ct-0

9D

ec-0

9Fe

b-10

Apr

-10

Jun-

10A

ug-1

0O

ct-1

0D

ec-1

0Fe

b-11

Apr

-11

Jun-

11A

ug-1

1O

ct-1

1D

ec-1

1Fe

b-12

Apr

-12

Jun-

12

CS Leveraged Loan Index Price

OTR LCDX 5Y (250 bp spread)

OTR CDX HY 5Y (500 bp spread)

Source: Credit Suisse * Under zero default

Source: Credit Suisse, Markit * As of July 26. Leveraged loan price is based on Credit Suisse Leveraged Loan Index

Exhibit 20: HY CLO Median Senior OC Cushion Exhibit 21: HY CLO Median Junior OC Cushion

4%

6%

8%

10%

12%

14%

16%

18%

Mar

-05

Aug-

05Ja

n-06

Jun-

06N

ov-0

6Ap

r-07

Sep-

07Fe

b-08

Jul-0

8D

ec-0

8M

ay-0

9O

ct-0

9M

ar-1

0Au

g-10

Jan-

11Ju

n-11

Nov

-11

Apr-1

2

2005 Vintage Senior OCTest Cushion - Median

2006 Vintage Senior OCTest Cushion - Median

2007 Vintage Senior OCTest Cushion - Median

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Mar

-05

Aug-

05Ja

n-06

Jun-

06N

ov-0

6Ap

r-07

Sep-

07Fe

b-08

Jul-0

8D

ec-0

8M

ay-0

9O

ct-0

9M

ar-1

0Au

g-10

Jan-

11Ju

n-11

Nov

-11

Apr-1

2

2005 Vintage Junior OCTest Cushion - Median

2006 Vintage Junior OCTest Cushion - Median

2007 Vintage Junior OCTest Cushion - Median

Source: Credit Suisse, INTEX Source: Credit Suisse, INTEX

Exhibit 22: US CLO Equity Price Index Exhibit 23: US HY CLO CCC Bucket

86.3

0102030405060708090

100

Dec

-07

Apr-0

8

Aug-

08

Dec

-08

Apr-0

9

Aug-

09

Dec

-09

Apr-1

0

Aug-

10

Dec

-10

Apr-1

1

Aug-

11

Dec

-11

Apr-1

2

2%3%4%5%6%7%8%9%

10%11%12%13%14%

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Source: Credit Suisse Source: Credit Suisse, INTEX

9 All charts and data are as of July 27, 2012

Page 12: The CDO Strategist

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Exhibit 24: 2012 US CLO Pricings

Date Transaction

Size* AAA AA A BBB BB PS**

Asset Manager Lead Manager ($mm) Spread/

DM Size Spread/

DM Size Spread/

DM Size Spread/

DM Size Spread/

DM Size Size 7/23 Fortress Credit Funding IV 173.8 165/ 55.8% 375/ 9.9% 480/ 8.8% 575/ 6.9% 625/ 4.8% 13.8% Fortress Investment Wells Fargo 7/23 Fortress Credit Funding V 408.8 165/ 55.8% 375/ 9.9% 480/ 8.8% 575/ 6.9% 625/ 4.8% 13.8% Fortress Investment Wells Fargo 7/19 Neuberger Berman 2012-XII 400.0 152/ 63.5% 275/ 10.7% 365/ 6.8% 550/ 3.9% 700/ 4.6% 10.5% Neuberger Berman UBS 7/13 Gramercy Park 2012-1 513.6 145/150 63.8% 225/290 6.6% 350/375 8.3% 450/600 4.7% 550/875 5.4% 11.3% BlackStone/GSO Citigroup 7/11 JFIN CLO 2012 312.5 150/ 58.6% 290/ 7.9% 350/ 8.9% 450/ 5.0% 550/ 5.8% 13.8% Jefferies Finance LLC Citigroup/GreensLedge 6/28 Private 144A Transaction 413.4 149/ 66.0% 275/ 8.4% 375/ 7.0% 500/ 4.9% 600/ 3.9% 9.8% [ ] [ ] 6/27 CIFC Funding 2012-1 464.0 144/ 64.2% 280/ 7.3% 350/ 7.3% 525/ 5.2% 700/ 5.0% 11.0% CIFC RBS/PNC 6/25 Madison Park Funding IX 523.0 148/ 61.0% 270/ 10.7% 360/ 6.9% 435/ 5.5% 525/ 4.2% 11.7% CSAM Goldman Sachs 6/22 OZLM Funding 2012 510.7 150/ 63.2% 325/ 11.4% 375/ 7.3% 500/ 3.7% 610/ 4.2% 10.1% Och Ziff JPM 6/15 Apidos CLO IX 409.8 140/145 65.3% 235/275 9.2% 375/425 6.5% 500/625 5.2% 650/850 4.2% 9.5% CVC Credit Partners Barclays 6/14 Slater Mill Loan Fund 311.6 145/ 61.4% 265/ 12.0% 380/ 7.0% 425/ 4.8% 550/ 4.5% 10.3% Shenkman Capital Management Bank of America 6/8 Carlyle GMS 2012-2 510.0 147/ 63.3% 300/ 10.8% 300/ 7.4% 470 4.7% 625/ 4.5% 9.3% The Carlyle Group JPM

6/7 Babson CLO 2012-II 406.9 140/140 62.7% 250/260 10.3% 300/375 7.9% 425/600 5.4% 525/785 5.0% 9.3% Babson Capital (fka DL Babson / Mass Mutual) Citigroup

6/4 Private 144A Transaction 514.0 135/ 62.5% 250/ 10.0% 360 8.7% 475/ 4.5% 550/ 3.9% 10.4% [ ] [ ] 5/23 ECP CLO 2012-4 311.5 135/135 64.6% 200/275 4.3% 250/425 10.0% 310/625 4.9% 435/850 4.5% 11.7% Silvermine Capital Mgmt. Citigroup 5/16 LCM XI 485.5 130/130 63.9% 215/250 10.8% 295/387 7.2% 450/575 4.5% 515/775 4.0% 9.6% Lyon Capital Mgmt. MS 5/16 KVK CLO 353.0 137/137 64.2% 250/285 10.2% 335/435 6.7% 510/610 4.5% 625/825 4.5% 10.0% Kramer Van Kirk Credit Strategies Goldman Sachs 5/16 Sugar Creek CLO 283.5 132/132 63.5% 270/275 9.9% 360/408 6.9% 408/565 4.4% 575/765 3.6% 11.7% 40/86 Advisors Wells Fargo 5/15 Babson 2012-II 409.4 130/ 62.3% 250/ 10.3% 300/ 7.8% 425/ 5.4% 525/ 4.4% 9.9% Babson Capital Citigroup 5/15 Blue Mountain CLO 2012-1 409.8 132/132 62.0% 255/270 10.7% 325/400 8.5% 435/575 4.7% 550/825 4.2% 9.9% Blue Mountain JPM 5/15 Venture X CLO 425.0 133/ 62.0% 235/ 13.1% 325/ 6.4% 420/ 4.4% 600/ 4.4% 9.8% MJX Asset Management UBS 5/9 Atlas Senior Loan Fund 308.3 132/ 62.0% 250/ 8.1% 350/ 8.1% 450/ 4.9% 625/ 5.3% 11.7% Crescent Capital Corp RBS 5/2 Cedar Funding Ltd. 355.4 130/135 64.0% 250/260 11.2% 300/400 6.9% 400/ 4.4% 600/ 3.7% 9.8% Aegon Citigroup 4/30 Golub Capital Partners CLO XI 411.0 135/135 62.5% 225/280 8.6% 300/435 7.5% 500/650 5.1% 5.1% 11.1% Golub Capital Citigroup 4/30 Race Point VI 414.0 130/130 59.2% 250/250 14.5% 360/375 6.9% 450/550 4.6% 550/775 4.2% 10.6% Sankaty Advisors Bank of America 4/23 Marathon CLO IV 356.0 62.4% 300/300 10.2% 310/420 7.8% 460/625 5.2% 575/825 4.6% 9.8% Marathon Asset Mgmt. LLC. JPM 4/23 OHA Credit Partners VI 673.7 132/132 59.8% 240/250 12.4% 315/385 6.5% 450/575 4.9% 550/775 4.8% 11.6% Oak Hill Advisors Morgan Stanley 4/19 Symphony CLO IX 621.3 130/130 61.2% 250/250 12.1% 325/400 7.0% 425/575 4.9% 500/785 4.5% 10.3% Symphony Asset Management Bank of America 4/19 NXT Capital CLO 2012-1 307.9 195/ 56.4% 380/ 6.7% 500/ 7.8% 575/ 5.0% 750/ 7.7% 16.4% NXT Capital Investment Advisers Wells Fargo 4/12 A5 Funding 833.0 250/ 47.5% 500/ 8.3% 600/ 5.0% 40.0% A5 Fund Mgmt. LLC Natixis 4/11 Fraser Sullivan CLO VII 458.7 130/130 59.6% 250/250 11.7% 300/425 8.5% 400/575 4.6% 550/775 4.1% 11.5% Fraser Sullivan Citigroup 4/4 ECP CLO 2012-3 462.4 140/140 64.9% 200/290 3.9% 250/450 10.4% 310/600 4.5% 435/814 5.4% 11.0% Silvermine Capital Management Citigroup 4/3 GoldenTree Loan Opportunity VI 526.8 130/130 60.0% 235/250 11.9% 325/400 7.4% 420/575 4.5% 550/775 4.2% 11.9% GoldenTree LLC Bank of America

Page 13: The CDO Strategist

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Exhibit 24: 2012 US CLO Pricings

Date Transaction

Size* AAA AA A BBB BB PS**

Asset Manager Lead Manager ($mm) Spread/

DM Size Spread/

DM Size Spread/

DM Size Spread/

DM Size Spread/

DM Size Size 3/30 Doral CLO II 416.2 147/147 64.8% 290/315 6.5% 250/465 8.3% 450/650 4.0% 550/850 5.0% 11.5% Doral Leveraged Asset Management Citigroup 3/27 Galaxy XII CLO 412.5 140/140 61.0% 260/265 13.3% 315/400 6.8% 400/610 4.6% 550/825 3.9% 10.4% PineBridge Investments Morgan Stanley 3/14 Babson CLO 2012-I 360.8 143/143 64.7% 200/275 7.5% 250/425 8.6% 400/625 5.0% 500/810 3.3% 10.8% Babson Capital Citigroup 3/9 Private 144A Transaction 509.9 143/143 62.8% 255/290 9.8% 380/435 6.9% 415/625 4.7% 575/825 4.5% 11.4% [ ] Wells Fargo/MUFJ 3/9 Madison Park CLO VIII 413.0 142/142 61.1% 270/300 11.7% 350/435 6.7% 435/630 4.9% 535/825 4.6% 11.0% CSAM Bank of America 3/1 Private 144A Transaction 361.9 145/145 62.7% 300/ 9.0% 415/ 7.7% 500/ 4.5% 625/ 3.9% 12.3% [ ] [ ] 2/29 AMMC CLO X 410.0 149/ 65.3% 250/ 10.2% 350/ 5.4% 450/ 3.9% 745/ 4.3% 11.0% American Money Management Corp. UBS 2/23 Avalon IV Capital Ltd. 350.0 150/150 66.0% 275/300 6.6% 360/425 9.1% 500/641 4.6% 610/825 3.9% 9.8% Invesco Senior Secured Mgmt. Nomura 2/22 OCP CLO 2012-1 326.8 150/150 66.6% 290/320 5.0% 350/475 8.1% 450/645 5.3% 550/850 5.1% 9.9% Onex Credit Partners Citi 2/22 Octagon Investment Partners XII 358.2 146/146 62.3% 250/300 12.3% 435/435 5.2% 460/633 4.9% 575/825 5.0% 10.4% Octagon Credit Investors Deutsche Bank

2/21 NewStar Commercial Loan Funding 2012-1 230.0 65.2% 34.8% NewStar Financial Natixis

2/3 Ares XXIII 430.0 150/150 63.0% 300/300 6.5% 375/475 10.0% 425/625 5.3% 560/825 4.8% 10.5% Ares Mgmt. Goldman Sachs 2/2 ALM V 436.7 150/150 62.5% 200/ 8.5% 300/ 8.6% 450/ 3.4% 5.9% 11.0% Apollo Credit Mgmt. LLC Citigroup 1/31 LCM X 410.0 148/148 63.2% 290/325 11.0% 315/425 7.2% 460/625 4.9% 575/825 4.1% 9.6% Lyon Capital Mgmt. Bank of America 1/18 Symphony CLO VIII 388.5 155/155 61.8% 250/330 11.3% 315/450 7.5% 460/640 4.8% 575/900 4.4% 10.2% Symphony CLO VIII Bank of America 1/12 Golub Capital Partners CLO 12 250.6 200/200 57.5% 400/400 7.0% 575/575 7.6% 28.0% Golub Capital Wells Fargo

2012 YTD TOTAL: 20,433 48 DEALS 2011 TOTAL: 12,228

* Size includes equity and retained tranches, excluding synthetic/unfunded tranches; ** PS = Preference Shares, i.e. equity. *** We counted Symphony's un-rated layer of mezzanine debt, which comprises about 4% of the stack, as equity Source: Credit Suisse, Informa Global Markets, the BLOOMBERG PROFESSIONAL™ Service

Page 14: The CDO Strategist

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US CDO Strategy, Insight & Market Recap 14

Appendix: Select CDO Research Reports The CDO Strategist Date Title Date Title Issue #1 May 11, 2005

Insight: Default Assumptions for BBB HEQ in SF CDOs

Issue #2 May 31, 2005

Insight: Calling Attention to CDO Calls

Issue #8 Sept. 30, 2005

Insight: An Introduction to REIT Trust Preferred CDOs

Issue #10 Oct. 31, 2005

Insight: Bank TruPS: Fine Tuning Historical Bank Failure Rates

Issue #12 Dec. 15, 2005

Insight: A Comparison of US and European CLOs

Issue #16 Mar. 31, 2006

Insight & Strategy: Commercial Real Estate CDOs: Revolutionizing Property Finance

Issue #17 Apr. 15, 2006

Insight & Strategy: Commercial Real Estate CDOs: Revolutionizing Property Finance

Issue #18 May 17, 2006

Insight & Strategy: WAS Test in SF CDOs: Causes & Implications Recap: Legal Maturity Extension in Recent CLOs

Issue #21 Sep. 15, 2006

Insight: SF CDO Rating Transition Performance – By Vintage Strategy: CDO Secondary Market Update and Opportunities

Issue #22 Oct. 5, 2006

Insight: Investment Guide for CDO Equity Investors

Issue #26 Feb. 29, 2007

Insight: Loan-level Attributes of 2006-Vintage Mezz. SF CDOs Strategy: Trouble Seen in Mezz. SF CDOs with Significant Exposure to Second-lien HEQ – A Case Study

Issue #27 Mar. 29, 2007

Insight: Impact of HEQ Downgrade on PIK-able Mezzanine SF CDO Tranches Strategy: Finding Value in Jr. AAA Tranches of Mezz. SF CDOs in Secondary Market – A Matrix-Based Approach

Issue #28 Apr. 30, 2007

Insight: Impact of HEQ Downgrade on PIK-able High Grade SF CDO Tranches

Issue #30 Jun. 29, 2007

Insight: Rating Agencies’ Criteria on Lev. Loan Recovery Rates in HY CLOs Strategy: Valuation of CDOs – Practice, Theory, and Pitfalls

Issue #32 Sep. 28, 2007

Insight: Are We “EOD” Yet? Strategy: How to Make Sense of the TABX Prices: A PO/IO Analysis

Issue #34 Nov 28, 2007

Insight: How Much In Write-downs to Expect from SF CDOs? Strategy: The Fate of SF CDO^2 Deals of Recent Vintage

Issue #39 Oct 23, 2008

Insight & Strategy: What Does A Consumer-led Deep Recession Mean to HY CLOs?

Issue #40 May 21, 2009

Insight & Strategy: An Overview of Current US CLO Market: Is the Rally Sustainable?

Issue #42 October 20, 2009

Insight & Strategy: Is the Window Open for Investing in Mezz/Sub CLO Tranches?

Issue #43 Nov 9, 2009

Insight & Strategy: CLO Investing: Plugging in Sensible Recovery Assumptions

Issue #44 Dec 7, 2009

Insight & Strategy: Light at the End of Tunnel for New-issue CLO Market?

Issue #45 Dec 16, 2009

Insight & Strategy: Rating Cash Flow CLOs – Insight, Hindsight, & Foresight

Issue #46 Jan 20, 2010

Insight & Strategy: 2010: Seeking “Alpha” in Uncharted Territory Issue #47 Feb 27, 2010

Insight & Strategy: As Volatility Goes Up, CLOs Still Attractive on a Relative Value Basis

Issue #48 March 19, 2010

Insight & Strategy: Finding Value in CLO Equity from “Hidden OC” Issue #49 April 27, 2010

Insight & Strategy: European CLOs Offer Greater Relative Value

Issue #50 May 26, 2010

Insight & Strategy: Wait and Look for Clearer Signals in an “Uncharted Territory”

Issue #51 June 16, 2010

Insight & Strategy: Recent Pullback Creates CLO Buying Opportunity

Issue #52 Aug 2, 2010

Insight & Strategy: Relative Values Across CLO Capital Structure Issue #53 Sep 22, 2010

Insight & Strategy: Up Against the “Maturity Wall” – Faster Loan Repayment Speed and CLO Reinvestment

Issue #54 Nov 5, 2010

Insight & Strategy: Why Did Leveraged Loan/CLO Outperform During The “Great Recession” of 2008/2009?

Issue #55 Dec 9, 2010

Insight & Strategy: Getting warm in the thaw of a recovery climate - US CLO 2010 review and 2011 forecast

Issue #56 Jan 24, 2011

Insight & Strategy: Has the Rally Gone Too Far, Too Fast? Issue #57 Feb 25, 2011

Insight & Strategy: What Drives CLO Equity Performance?

Issue #58 Mar 25, 2011

Insight & Strategy: Comments on Moody’s Proposed New CLO Rating Methodology

Issue #59 Apr 28, 2011

Insight & Strategy: What Will Happen to the CLO Market When the Fed Turns Off the Tap, IF It Is Going to?

Issue #60 May 26, 2011

Insight & Strategy: Back to the Future? – A Quick Review of Recent New CLOs

Issue #61 June 28, 2011

Insight: Moody’s Finalized Its New CLO Methodology Strategy: How Likely Will CLOs Be Called?

Issue #62 July 26, 2011

Insight & Strategy: A Tug of War: Rating Upgrade vs. Extension Risk Issue #63 Aug 16, 2011

Insight: Will WAL Limitation Mitigate Extension Risk? Strategy: Checking the Technical Pulse for CLO Market

Issue #64 Sep 27, 2011

Insight & Strategy: Stress Testing CLOs Using 2008-2009 Experience Issue #65 Oct 27, 2011

Insight & Strategy: Empirical Evidence of Default and Recovery in US CLOs

Issue #66 Nov 30, 2011

Insight & Strategy: CLO Investment Strategy for 2012 Issue #67 Jan 9, 2012

Insight & Strategy: US CLO 2012 Outlook: Eye on the Big Picture

Issue #68 Feb 29, 2012

Insight & Strategy: CLO Equity Primer Issue #69 March 29, 2012

Insight & Strategy: What has been priced in CLO equities?

Issue #70 May 1, 2012

Insight & Strategy: Who gets the incentives? – A review of CLO incentive management fees

Issue #71 May 31, 2012

Insight: The controversy surrounding long-dated assets in CLOs Strategy: Does CLO’s exposure to TXU pose tail risk?

Issue #72 June 28, 2012

Insight: Are “Debt-friendly” Managers Also “Equityfriendly?” Strategy: Impact of FRB’s Final Market Risk Capital Rule on CLOs

Page 15: The CDO Strategist

GLOBAL SECURITIZED PRODUCTS RESEARCH

Roger Lehman, Managing Director Global Head of Securitized Products Research

+1 212 325 2123 [email protected]

Eric Miller, Managing Director Global Head of Fixed Income and Economic Research

+1 212 538 6480 [email protected]

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 [email protected] Vikram Rao, Vice President +1 212 325 0709 [email protected] 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] [email protected]

MODELING AND ANALYTICS

David Zhang, Managing Director Group Head +1 212 325 2783 [email protected]

Taek Choi, Vice President +1 212 538 0525 [email protected]

Oleg Koriachkin, Vice President +1 212 325 0578 [email protected]

Tony Tang, Vice President +1 212 325 2804 [email protected]

Yihai Yu, Vice President +1 212 325 1143 [email protected]

Joy Zhang, Vice President +1 212 325 5702 [email protected]

Jack Yu, Vice President +1 212 538 5597 [email protected]

LOCUS ANALYTICS

Brian Bailey, Director Locus Analytics Specialist +1 212 325 0182 [email protected]

Shana Bornstein, Associate Locus Analytics Specialist +1 212 325 1083 [email protected]

LONDON JAPAN

Carlos Diaz, Vice President + 44 20 7888 2414 [email protected]

Tomohiro Miyasaka, Director Japan Head + 81 3 4550 7171 [email protected]

Page 16: The CDO Strategist

Disclosure Appendix

Analyst Certification I, David Yan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my 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.

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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.

Backtested, Hypothetical or Simulated Performance Results Backtested, hypothetical or simulated performance results have inherent limitations. Unlike an actual performance record based on trading actual client portfolios, simulated results are achieved by means of the retroactive application of a backtested model itself designed with the benefit of hindsight. Backtested performance does not reflect the impact that material economic or market factors might have on an adviser's decision-making process if the adviser were actually managing a client's portfolio. The backtesting of performance differs from actual account performance because the investment strategy may be adjusted at any time, for any reason, and can continue to be changed until desired or better performance results are achieved. The backtested performance includes hypothetical results that do not reflect the reinvestment of dividends and other earnings or the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid. No representation is made that any account will or is likely to achieve profits or losses similar to those shown. Alternative modeling techniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor guarantee of future returns. Actual results will vary, perhaps materially, from the analysis. As a sophisticated investor, you accept and agree to use such information only for the purpose of discussing with Credit Suisse your preliminary interest in investing in the strategy described herein.

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