Presentation on Collateralized Debt Obligations

2. What Are Collateralized Debt Obligations (CDOs)? Type of SPE constructed to hold assets as collateral and to sell tranches of the cash flows derived from the underlying assets to “QIBs”

3. The Taxonomy of CDOs

5. Mezzanine Debt

6. Middle Market Loans

7. Non-Performing Loans

8. Distressed Debt and DIP Financings

9. Non-funded Loan Commitments

10. Forfaiting Assets (trade finance-related debt)

11. Private Equity

12. Hedge Funds

13. Derivative Exposures

14. Synthetic Securities

15. High Yield Bonds

16. Leveraged Bank Loans (both term and revolving)

17. Investment Grade Bonds and Loans (both term and revolving)

18. Emerging Market Sovereign Debt

19. Emerging Market Corporate Debt

20. Asset-Backed Securities (ABS) (including CDO securities)

21. Mortgage-Backed Securities (MBS & CMBS)

23. “Mark to Market ” eliminated through securitization

24. Market Value

26. Initiated by originators to remove assets from the balance sheet

27. Arbitrage CDO

28. Initiated by Investors

30. Assets held constant over the life of the transaction

31. Managed CDO

33. European CDOs

34. Emerging Market CDOs

35. Asian CDOs

36. Japanese CDOs

37. Korean CDOs

40. The Anatomy of CDOs

42. Investors

43. Trustee or Custodian

44. The Collateral Manager or Asset Manager

45. Swaps Dealer or the Hedge Counterparty

46. External Credit Enhancer or Bond Insurer

47. Rating Agencies

51. S&P

52. Fitch

54. Default Probability

56. Moody’s utilizes a metric called a WARF score (Weighted Average Rating Factor) and D-Score (Diversification) to gauge the riskiness of the CDO Collateral

57. In calculating the WARF, each asset is given a numerical ranking, which corresponds with its rating level, and indicates that asset’s theoretical default probability over a 10 year time frame

59. From a Rating Agency perspective, CRE CDOs are grouped into two general classifications; 1) CUSIP CDOs – which mainly consist of rated collateral such as CMBS and/or REIT and CREL CDOs which mostly contain unrated collateral such as whole loans, mezzanine loans and B-notes

60. Early CDOs allowed B-piece buyers and special servicers to achieve higher leverage and greater diversity in their investments. Subordinate lenders often exercise great influence on the fortune of troubled CRE loans

63. Non mark-to-market - No triggers that would require the borrower to post additional collateral. Significant advantage during volatile credit markets

64. Significant flexibility regarding asset substitution/replenishment

65. For Asset Mangers it creates portfolio diversity along with increased management fees

69. CMBS

70. Mezzanine Loans – A loan secured by a pledge of equity in the mortgage borrower. Subordinate to the A-note and B-note

71. Whole Loans – Unrated and unsecured CMBS asset. Grouped into three types: stabilized, transitional (typically land projects) and developmental

72. Credit Tenant Lease – A loan backed by the property’s rent payments

73. Preferred Equity

74. REIT Debt

75. Rake Bonds – A junior participation or B-note that is held inside of a REMIC

77. Additional Examples of Collateral Evolution

78. Basic Structure

79. The Capital Structure

80. Hypothetical Office Loan Structure

81. CRE CDO Buyer Base The geographic distribution of CRE CDO is approximately 65% domestic investors and 35% international investors.

82. CRE CDO vs CMBS CRE CDO spreads have been historically wider than the spreads of CMBS (A triple-A CRE CDO paper can offer 10bp to 30bp pickup over comparable rated CMBS)