CMBX Indices The New US Commercial Mortgage Backed Credit Default - - PowerPoint PPT Presentation

CMBX Indices

The New US Commercial Mortgage Backed Credit Default Swap Benchmark Indices

March 2006

The New US CMBS Benchmark Index 2

The New US CMBS CDS Benchmark - Themes

Liquidity Diversification Innovation Standardization Flexibility Efficiency Transparency

The New US CMBS Benchmark Index 3

Table of Contents

The New Benchmark CMBX Indices 4 CMBX.NA Index - Portfolio Rules of Construction 17 Reference Portfolio 20 Trading, Credit Events and Roll Mechanism 22 Contacts 28

The New Benchmark CMBX Indices

The New US CMBS Benchmark Index 5

CDS IndexCo Introduces Its Newest Series of Indices: CMBX

CDS IndexCo

– Owns and maintains the CMBX, ABX & DJ CDX family of credit default swap (CDS) indices – Liquidity commitments on CMBX, ABX & CDX from 14, 15, & 21 dealer institutions, respectively – CMBX commences trading on March 7, 2006 – DJ CDX NA was formed from a merger of the major CDS indices (iBoxx and Trac-X) in April 2004 – Between $25 and $50 billion of CDX notional volume traded daily – Introduction of second generation product such as index tranches and index options

Broad market acceptance and effective management of the indices has resulted in increased:

– Liquidity – Transparency – Market consensus (portfolio names, correlation calculations) – Standardization

The New US CMBS Benchmark Index 6

CDS IndexCo Creates the Benchmark for CDS of CMBS

Liquidity

– Focus on the commercial mortgage backed sector – Proven liquidity track record from the market-making group – Multiple market-maker platform

Transparency

– Objective, rules-based approach to portfolio construction – Markit as administrator – Daily prices available on Markit website

Standardization

– Each index will reference a standardized basket of CMBS reference obligations – Standardized documentation for contracts will promote operational efficiency – Monthly payment amounts calculated and posted by Markit – DTCC will offer efficient trade confirmation and settlement

The New US CMBS Benchmark Index 7

Key Features

Clear rules for portfolio construction Standardization and multi-market maker platform to ensure transparency Active participation of Markit as Administration, Calculation, and Marketing Agent Approximately every six months One roll mechanism agreed across all market-makers Simple and clear roll mechanism

Liquidity & Track Record Rolling Transparency

Five separate indices at benchmark rating levels (AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2, & BBB-/Baa3) Unfunded Future Products – Funded Note Program – Tranched Series ISDA Pay-As-You-Go template – Fixed Cap Applicable Standardized documentation No fees Static portfolio No physical settlement

Structure Product Breadth

Track record in CDS flow market and other credit indices The largest platform of leading market makers Inter-dealer broker participation Likely to increase trade flow in structured products Potential to impact cash spreads

The New US CMBS Benchmark Index 8

CMBX Participants

Five indices referencing similarly rated tranches from 25 deals

• Rules-based approach to construction
• New series of CMBX indices issued approximately every 6 months
• Suits a variety of investors looking for diversified CMBS exposure

Research

Relative value trades Directional trading / macro view Relative value trades Directional trading Quick credit exposure / hedging Liquidity management tool

Hedge Funds Asset Managers Prop Trading Desks

Source of credit spread data Suitable for portfolio hedging Easy ramp-up Quick credit exposure / hedging Transparent spread hedging

Correlation Trading Desks Whole Loan Originators Corporate Treasury

Benchmark for product innovation Flow trading

Dealers

Easy access to diversified US CMBS exposure

The New US CMBS Benchmark Index 9

Benchmark Liquidity and Tradability

Market-Makers of CMBX

Bank of America Goldman Sachs Nomura International Bear Stearns JPMorgan RBS Greenwich Capital Citigroup Lehman Brothers UBS Credit Suisse Merrill Lynch Wachovia Deutsche Bank Morgan Stanley

Inter-Dealer Brokers

CMBX is expected to trade in the inter-dealer broker market

Liquidity

• Securitizations backed by commercial mortgages are the 2nd largest sector in the US

structured finance markets

• Increasing liquidity in the CDS of CMBS market
• Valuation analytics publicly available on www.markit.com

The New US CMBS Benchmark Index 10

CMBX Indices – Designed for Operational Efficiency

Trades will confirm over DTCC from initial launch date

– DTCC confirms for all inter-dealer trades and trades with customers who are enabled

• Trades can be input using DTCC’s existing corporate index template

– Trades will be documented using two-page confirms, referencing a standard terms supplement and annex posted on Markit’s website – Initial factors for underlying reference obligations will be posted on Markit’s website

Standardized settlement calculation

– Markit will publish monthly fixed and floating payments for each contract

Valuation analytics publicly available on www.markit.com Licensed dealers will provide daily closes for the most recent index series and monthly pricing on previously issued outstanding series

The New US CMBS Benchmark Index 11

About Markit

Markit is the Administration, Calculation and Marketing Agent for the ABX.HE index program Markit is the Administration and Calculation Agent for the DJ CDX index program Markit Background:

– Founded in 2001 by a team of credit market professionals to aggregate and provide clean credit data across asset classes on a single platform – Asset Classes include: CDS (Corporate, ABS, and CMBS), Bonds (corporate, financial, sovereign, convertible), Asset- and Commercial Mortgage-Backed Securities, Syndicated Loans and Index Products – Markit Reference Entity Database (RED) is the market standard for reference entity long legal names, reference entity-reference obligation relationships and “pair” identifiers – The key industry source for accurate, consensus pricing for independent price verification, risk modelling and data back testing – The industry source for standardized CDO and 1st-to-default valuations, OTC derivative valuations as well as corporate dividend payment and equity index constituent information

The New US CMBS Benchmark Index 12

Markit CMBX Calculator

Data on page is for example purposes only

**Powered by Trepp, the leading provider of CMBS and commercial mortgage information, analytics and technology to the securities and investment management community.

The New US CMBS Benchmark Index 13

Holders of Commercial and Multifamily Mortgage Loans:

Change in Market Share Since 1990 ($ Billions)

Source: CMSA, Commercial Mortgage Alert

1990 2005 3Q

The New US CMBS Benchmark Index 14

CMBS Issuance in the U.S. Bond Markets since 1990

($ Billions)

S

• u

r c e : C M S A , C

• m

m e r c i a l M

• r

t g a g e A l e r t

The New US CMBS Benchmark Index 15

CMBS Review of 2004 & 2005

(Trading Volume in $ Billions)

Source: CMSA, CRE Direct News 50 100 150 200 250 300 Jan Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Cumulative Vols. 5 10 15 20 25 30 Monthly Vols. Cumulative '04 Cumulative '05 Monthly '04 Monthly '05

The New US CMBS Benchmark Index 16

Commercial Mortgage Securitization 1990 through 2005 Q3

Source: CMSA, Federal Reserve, Flow of Funds

Portfolio Rules of Construction

The New US CMBS Benchmark Index 18

CMBX.NA Index Program – Index Construction Algorithm

Reference obligations considered must have the following characteristics prior to the launch/roll date

• Been issued within the last two years
• Minimum deal size of USD 700 million
• Be a debt or pass-through security referencing a pool of fixed rate securities
• Have a factor of 1.0
• Be secured by obligations from at least 50 separate mortgages from at least 10 unaffiliated borrowers
• No more than 40% of underlying obligations can be from the same state
• No more than 60% of underlying obligations can be of the same property type
• Ratings provided by at least two of the following: Moody’s, Fitch, and S&P; the lesser of all ratings will apply

Five indices based upon the rating of the reference obligations: AAA, AA, A, BBB, and BBB-

• One bond from each deal will be referenced in each index

– AAA will be comprised of the most credit enhanced tranche with the longest average life with an initial issuance size of at least $100MM & a weighted average life between 8 & 12 years based on 0% CPY at issuance – AAA must be a publicly issued security, whereas other rating classes can be publicly or privately issued

• Reference obligations equally weighted by initial par amount as of roll date (4.0% each), subsequent weightings

may change based on the prepayment and credit experience of the underlying transactions

• Based on standard ISDA Pay-As-You-Go template
• Index represents aggregate performance of the basket of credit default swaps
• Each index will contain this same list of reference obligations until all reference obligations have been fully paid off
• r have matured

The New US CMBS Benchmark Index 19

CMBX Index Family – Construction/Roll of the Index Timeline

Roll Date less 1 Day (5pm) Roll Date less 1 Day (1pm) Roll Date less 3 Days Roll Date less 4 Days Roll Date less 6 Days Roll Date less 10 Days Markit discloses the Fixed Rate to the public and all Eligible CMBX Members Markit solicits spreads for each index from each Eligible CMBX Member and will compute the Fixed Rates Markit publishes a draft of the Annex for each forthcoming CMBX to each Eligible CMBX Member & the public Markit informs all Eligible CMBX Members of the composition of the forthcoming CMBX index & publishes to the public the composition of such index Markit proposes additional CMBS transactions to replace any initial transactions that received a 75% majority vote for elimination & continues until a final list is compiled & discloses additional names to the public Markit determines an initial list of 25 CMBS transactions for inclusion in the index & submits to Eligible CMBX Members

Reference Portfolio

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Reference Entities for the CMBX (Date of Publication: February 22, 2006)

MERRILL LYNCH MORTGAGE TRUST 2005-CKI1 25 MERRILL LYNCH MORTGAGE TRUST 2005-LC1 24 WACHOVIA BANK COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES SERIES 2005-C22 23 WACHOVIA BANK COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES SERIES 2005-C21 22 MORGAN STANLEY CAPITAL I TRUST 2006-TOP21 21 MORGAN STANLEY CAPITAL I TRUST 2005-IQ10 20 MORGAN STANLEY CAPITAL I TRUST 2005-HQ7 19 LB-UBS COMMERCIAL MORTGAGE TRUST 2006-C1 18 LB-UBS COMMERCIAL MORTGAGE TRUST 2005-C7 17 LB-UBS COMMERCIAL MORTGAGE TRUST 2005-C5 16 J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-LDP5 15 J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-LDP4 14 J.P. MORGAN CHASE COMMERCIAL MORTGAGE SECURITIES CORP., SERIES 2005-CIBC13 13 GMAC Commercial Mortgage Securities, Inc. Series 2006-C1 Trust 12 GE Commercial Mortgage Corp. Series 2005-C4 11 CSFB Commercial Mortgage Trust 2005-C6 10 CSFB Commercial Mortgage Trust 2005-C5 9 COMMERCIAL MORTGAGE TRUST 2005-GG5 8 CD 2005-CD1 COMMERCIAL MORTGAGE TRUST COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2005-CD1 7 BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES TRUST 2005-TOP20 6 Bear Stearns Commercial Mortgage Securities Trust 2005-PWR9 5 BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES TRUST 2005-PWR10 4 Banc of America Commercial Mortgage Inc., Series 2005-6 3 Banc of America Commercial Mortgage Inc., Series 2005-5 2 Banc of America Commercial Mortgage Inc., Series 2005-4 1

Trading, Credit Events and Roll Mechanism

The New US CMBS Benchmark Index 23

CMBX: Indicative terms and conditions

• Indices:
• Notional:

Amortization mirrors that of the underlying bonds

• Fixed Rate:

Established 1-day prior to roll date. Payable monthly based on average balance

• Floating Rate Payments:

Interest Shortfall, Writedown, Principal Shortfall

• Additional Fixed Payments:

Interest Shortfall Reimbursement, Writedown Reimbursement, Principal Shortfall Reimbursement

• Quotations:

Dealers will quote a current market spread and exchange upfront amounts based on the difference between the current market spread and the Fixed Rate

• Physical Settlement:

Not Applicable

• Accruals:

Accrues 25th to 25th

• Payments:

Payments made on the 25th of each month

• Day Count:

Actual/360

Indices Scheduled Termination Date Fixed Rate CMBX.NA.AAA.1 TBD [ ] CMBX.NA.AA.1 [ ] CMBX.NA.A.1 [ ] CMBX.NA.BBB.1 [ ] CMBX.NA.BBB-.1 [ ] TBD TBD TBD TBD

The New US CMBS Benchmark Index 24

Trading - XYZ Sells Protection on $100MM CMBX.NA.A.1

Fixed Rate Payer = Protection Buyer = Index Buyer

• Pays [70] basis points per annum monthly to

counterparty on notional amount

– Notional amount will decline over time based on the reference

• bligations amortization
• Receives Floating Payments in the event of a:

– Interest Shortfall (capped at fixed rate) – Principal Shortfall – Writedown

• Makes payment in the event of the following:

– Interest Shortfall Reimbursement Amount – Principal Shortfall Reimbursement Amount – Writedown Reimbursement Amount

The Fixed Rate on CMBX.NA.A.1 Index is [70] basis points per annum, payable monthly

Floating Rate Payer = Protection Seller = Index Seller

• Receives [70] basis points per annum monthly to

counterparty on notional amount

– Notional amount will decline over time based on the reference

• bligation’s amortization
• Pays Fixed Rate Payer in the event of a:

– Interest Shortfall (capped at fixed rate) – Principal Shortfall – Writedown

• Receives payment in the event of the following:

– Interest Shortfall Reimbursement Amount – Principal Shortfall Reimbursement Amount – Writedown Reimbursement Amount

The New US CMBS Benchmark Index 25

Credit Event (Writedown) - XYZ Sells Protection on $100MM CMBX.NA.A.1

Credit Event - Writedown

• Reference Obligation Original Factor = 1.0; Current Factor = 0.7
• A Writedown occurs on a Reference Obligation, for example, in year 3, in the amount of 1% of its

current principal balance

– (Current Factor * Weighting * Loss) = (0.70 * .04 * .01) = .00028 = 0.028%

• Protection Seller pays to Protection Buyer a floating amount (0.028% x 100MM)= $28,000
• Index notional amount on which premium is paid reduces by 0.028%, in addition to the principal

payments of the month

• Following the Floating Payment Event, protection seller receives premium of [70] bps on the

remaining index notional amount

The New US CMBS Benchmark Index 26

CMBX.NA Trading Mechanics

• Seller of protection (Index Seller) pays

Buyer of protection the difference in market value

• Seller of protection pays Buyer of

protection the accrued premium for the period from the end of the last accrual period until the trade effective date

• Buyer of protection (Index Buyer) pays

the Seller of protection the difference in market value

• Buyer of protection receives accrued

premium from the Seller of protection for the period from the end of the last accrual period until the trade effective date Trade Initiation Index quoted lower than Fixed Rate

• Implies spreads have tightened

Index quoted higher than Fixed Rate

• Implies spreads have widened

Trade Date Each CMBX Has a Fixed Rate

• Buyer of protection pays the Seller of

protection the difference in market value

• Buyer of protection pays the Seller of

protection the accrued premium for the period from the end of the last accrual period until the trade effective date

• Seller of protection pays the Buyer of

protection the difference in market value

• Seller of protection receives the

accrued premium from the end of the last accrual period until the trade effective date from the buyer of protection Trade Termination

The New US CMBS Benchmark Index 27

Appendix

Credit Derivatives Physical Settlement Matrix and Confirmation

– www.isda.org

CMBX Confirmation

– www.markit.com

The New US CMBS Benchmark Index 28 Markit Administration Ben Logan (212) 931-4925 Public Relations Teresa Chick 011 44 207 890 5094

Citigroup John Caputo (212) 723-6156 Credit Suisse James Hiatt (212) 325-4240 Morgan Stanley Ross Feldman (212) 761-2012 Merrill Lynch Shaun Heelan (212) 449-3860 JPMorgan Andrew Taylor (212) 834-3813 Goldman Sachs Josh Birnbaum (212) 902-5553 Deutsche Bank Stephen Schwartz (212) 250-5149 Lehman Brothers John Beaman (212) 526-0001 Wachovia Frank Tippett (704) 383-6778 UBS David McNamara (212) 713-6189 Bank of America Charles Mather (704) 388-1597 RBS Greenwich Capital Brian Schwartz (203) 625-2900

CDS IndexCo Acting Chair Brad Levy (212) 902-6590 Public Relations Jennifer Lee (310) 785-0810

Bear Stearns Todd Kushman (212) 272-4879 Nomura International Phillip Evanski (212) 667-2485