M O R G A N S T A N L E Y R E S E A R C H CMBX Primer January 14, 2014 · PDF file · 2014-01-23• CMBX is a synthetic CMBS index referencing 25 fixed- rate conduit CMBS transactions

M O R G A N S T A N L E Y R E S E A R C H

1

CMBX Primer January 14, 2014


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CMBX: The Long and Short of It

4:00 – 5:00 p.m.

Moderator: Brian Lancaster, President, The Minot Group, LLC; Professor of Finance, Stern School, NYU Panelists: Domenico AcriGarofalo, Portfolio Manager, One William Street Capital Management Michael Kreicher, Vice President, Morgan Stanley Samir Lakhani, Managing Director, BlackRock Jennifer Shum, Senior Portfolio Manager, Healthcare of Ontario Pension Plan


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CMBX: The Long and Short of It

4:00 – 5:00 p.m.

Program Topics: • Background introduction on CMBX • Synthetics as investment vehicles: Who is using it as an investment tool? • How investors are using to hedge, short, and invest in CMBS, long and short term. • How are they being used for portfolio protection and enhancement? • Who are the users? (Hedge Funds, Conduits, Money Market Funds and Life Insurance Companies) • Regulatory and capital issues


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CMBX Primer M O R G A N S T A N L E Y R E S E A R C H North America Richard Hill Morgan Stanley & Co. LLC [email protected] +1 212 761-9840

January 14, 2014

Due to the nature of the fixed income market, the issuers or bonds of the issuers recommended or discussed in this report may not be continuously followed. Accordingly, investors must regard this report as providing stand-alone analysis and should not expect continuing analysis or additional reports relating to such issuers or bonds of the issuers. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

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5


CMBX Referenced Deals

Source: Trepp, Morgan Stanley Research

• CMBX is a synthetic CMBS index referencing 25 fixed-rate conduit CMBS transactions issued over an approximately 6-month time period.

• The tranches within each CMBX series reference a static portfolio of 25 deals which are most often only in that series.

• CMBX.4 and CMBX.5 however do reference 7 of the same deals.

Deal Closing Deal Closing Deal Closing Deal Closing Deal Closing Deal ClosingName Date Name Date Name Date Name Date Name Date Name DateBACM 2005-4 9/28/2005 BACM 2006-2 6/22/2006 BACM 2006-6 11/29/2006 BACM 2007-2 6/6/2007 BACM 2007-4 11/20/2007 CGCMT 2012-GC8 9/27/2012BACM 2005-5 10/13/2005 BACM 2006-3 8/2/2006 BACM 2007-1 2/27/2007 BACM 2007-3 7/26/2007 BACM 2007-5 12/28/2007 COMM 2012-CCRE1 5/30/2012BACM 2005-6 12/29/2005 BACM 2006-4 8/29/2006 BSCMS 2006-PW14 12/19/2006 BSCMS 2007-PW16 6/27/2007 BSCMS 2007-PW17 9/27/2007 COMM 2012-CCRE2 8/22/2012BSCMS 2005-PW10 12/20/2005 BACM 2006-5 10/12/2006 BSCMS 2007-PW15 3/29/2007 BSCMS 2007-PW17 9/27/2007 BSCMS 2007-PW18 12/27/2007 COMM 2012-CCRE3 10/18/2012BSCMS 2005-PWR9 9/28/2005 BSCMS 2006-PW12 6/21/2006 CD 2007-CD4 3/29/2007 CGCMT 2007-C6 7/31/2007 BSCMS 2007-T28 10/25/2007 COMM 2012-CCRE4 11/13/2012BSCMS 2005-T20 10/28/2005 BSCMS 2006-PW13 9/27/2006 CGCMT 2006-C5 11/21/2006 COMM 2007-C9 8/14/2007 CD 2007-CD5 11/29/2007 COMM 2012-CCRE5 12/13/2012CD 2005-CD1 11/15/2005 CGCMT 2006-C4 6/29/2006 COMM 2006-C8 12/21/2006 CSMC 2007-C3 6/29/2007 CGCMT 2008-C7 4/25/2008 GSMS 2012-GCJ7 6/7/2012CSFB 2005-C5 11/9/2005 COMM 2006-C7 6/7/2006 CSMC 2006-C5 12/22/2006 CSMC 2007-C4 9/7/2007 CSMC 2007-C4 9/7/2007 GSMS 2012-GCJ9 11/29/2012CSFB 2005-C6 12/28/2005 CSMC 2006-C3 6/30/2006 CSMC 2007-C1 3/16/2007 CWCI 2007-C3 8/17/2007 CSMC 2007-C5 11/14/2007 JPMCC 2012-C6 4/26/2012GCCFC 2005-GG5 11/3/2005 CSMC 2006-C4 9/28/2006 CWCI 2006-C1 12/21/2006 JPMCC 2007-CB19 6/14/2007 CSMC 2008-C1 4/18/2008 JPMCC 2012-C8 10/18/2012GECMC 2005-C4 12/14/2005 GCCFC 2006-GG7 7/12/2006 GCCFC 2007-GG9 3/8/2007 JPMCC 2007-CB20 9/28/2007 GCCFC 2007-GG11 10/30/2007 JPMCC 2012-CBX 6/29/2012GMACC 2006-C1 1/31/2006 JPMCC 2006-CB15 6/20/2006 JPMCC 2006-CB17 11/28/2006 JPMCC 2007-LD11 7/5/2007 JPMCC 2007-C1 12/20/2007 JPMCC 2012-LC9 12/21/2012JPMCC 2005-CB13 11/29/2005 JPMCC 2006-CB16 9/21/2006 JPMCC 2006-LDP9 12/21/2006 JPMCC 2007-LD12 8/30/2007 JPMCC 2007-CB20 9/28/2007 MSBAM 2012-C5 7/30/2012JPMCC 2005-LDP4 9/29/2005 JPMCC 2006-LDP7 6/29/2006 JPMCC 2007-CB18 3/7/2007 LBCMT 2007-C3 7/26/2007 JPMCC 2007-LD12 8/30/2007 MSBAM 2012-C6 10/17/2012JPMCC 2005-LDP5 12/28/2005 LBUBS 2006-C4 6/29/2006 JPMCC 2007-LDPX 3/29/2007 LBUBS 2007-C2 5/9/2007 JPMCC 2008-C2 5/8/2008 MSC 2012-C4 3/28/2012LBUBS 2005-C5 8/25/2005 LBUBS 2006-C6 10/4/2006 LBUBS 2006-C7 12/5/2006 LBUBS 2007-C6 8/30/2007 LBUBS 2007-C6 8/30/2007 UBSBB 2012-C2 7/17/2012LBUBS 2005-C7 11/4/2005 MLCFC 2006-2 6/28/2006 LBUBS 2007-C1 2/27/2007 MLCFC 2007-7 6/13/2007 LBUBS 2007-C7 11/30/2007 UBSBB 2012-C3 9/27/2012LBUBS 2006-C1 2/1/2006 MLCFC 2006-3 9/29/2006 MLCFC 2006-4 12/12/2006 MLCFC 2007-8 8/28/2007 LBUBS 2008-C1 4/29/2008 UBSBB 2012-C4 12/20/2012MLMT 2005-CKI1 12/7/2005 MLMT 2006-C2 8/17/2006 MLCFC 2007-5 3/14/2007 MLMT 2007-C1 8/16/2007 MLCFC 2007-8 8/28/2007 UBSCM 2012-C1 5/8/2012MLMT 2005-LC1 12/28/2005 MSC 2006-HQ9 8/17/2006 MSC 2006-HQ10 11/9/2006 MSC 2007-IQ14 5/30/2007 MLCFC 2007-9 11/14/2007 WFCM 2012-LC5 9/28/2012MSC 2005-HQ7 11/30/2005 MSC 2006-IQ11 6/8/2006 MSC 2006-IQ12 12/21/2006 MSC 2007-IQ15 8/23/2007 MSC 2007-HQ13 12/28/2007 WFRBS 2012-C10 12/19/2012MSC 2005-IQ10 10/25/2005 MSC 2006-T23 8/3/2006 MSC 2007-HQ11 2/28/2007 MSC 2007-T27 7/30/2007 MSC 2007-IQ15 8/23/2007 WFRBS 2012-C6 4/4/2012MSC 2006-T21 1/30/2006 WBCMT 2006-C25 5/31/2006 MSC 2007-IQ13 3/29/2007 WBCMT 2007-C31 5/23/2007 MSC 2007-IQ16 11/29/2007 WFRBS 2012-C7 6/28/2012WBCMT 2005-C21 10/27/2005 WBCMT 2006-C26 6/29/2006 MSC 2007-T25 1/30/2007 WBCMT 2007-C32 6/28/2007 MSC 2008-T29 2/29/2008 WFRBS 2012-C8 8/7/2012WBCMT 2005-C22 12/29/2005 WBCMT 2006-C27 8/23/2006 WBCMT 2006-C29 12/21/2006 WBCMT 2007-C33 8/22/2007 WBCMT 2007-C34 11/13/2007 WFRBS 2012-C9 10/30/2012

CMBX.1 CMBX.2 CMBX.3 CMBX.4 CMBX.5 CMBX.6

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6


Index Structure & High Level Characteristics


• The CMBX product consists of 6 series and 44 individual tranches that segment the entire conduit CMBS capital structure by vintage and original tranche.

• The table to the left illustrates the coupons and pricing information for the most actively traded tranches. We do not show CMBX.BBB, BBB- and BB tranches for Series 1- 5.

• The table below provides vintage information with the collateral composition and current performance statistics.

Average Average AverageTranche Coupon Enhancement Thickness Detach Price SpreadAAA.1 10 37.0 63.0 100.0 99.36 50AAA.2 7 33.2 66.8 100.0 99.09 47AAA.3 8 33.2 66.8 100.0 98.38 66AAA.4 35 32.9 67.1 100.0 98.55 80AAA.5 35 31.7 68.3 100.0 98.17 88AM.1 50 23.4 24.3 47.7 98.78 117AM.2 50 20.3 12.9 33.2 97.67 143AM.3 50 20.4 12.8 33.2 94.41 243AM.4 50 20.0 13.0 32.9 93.52 244AM.5 50 19.0 12.7 31.7 93.05 237AJ.1 84 13.1 10.4 23.4 96.47 278AJ.2 109 10.4 9.9 20.3 90.18 509AJ.3 147 9.6 10.8 20.4 77.83 976AJ.4 96 10.2 9.8 20.0 78.04 809AJ.5 98 9.9 9.1 19.0 77.9 724AA.1 25 10.2 2.4 12.5 81.55 1,068AA.2 15 7.8 2.4 10.1 68.29 1,427AA.3 27 7.1 2.1 9.2 36.95 3,082AA.4 165 7.6 1.8 9.4 47.6 2,222AA.5 175 7.3 1.5 8.8 55.4 1,731A.1 35 6.2 2.1 8.3 63.48 2,004A.2 25 4.5 1.8 6.3 33.1 3,879A.3 62 4.2 1.5 5.7 15.23 5,715A.4 348 4.7 1.2 5.8 26.6 4,287A.5 350 4.2 1.1 5.3 34.85 3,120AAA.6 50 30.4 69.6 100.0 97.4 84AS.6 100 21.0 9.4 30.4 98.93 114AA.6 150 15.7 5.3 21.0 99.47 157A.6 200 12.0 3.5 15.6 99.43 208BBB-.6 300 6.9 4.1 11.0 98.77 317

CMBX.1 CMBX.2 CMBX.3 CMBX.4 CMBX.5 CMBX.6Avg Deal Size ($B) 1,780 1,934 1,890 2,550 1,607 1,185Avg Loan Size ($MM) 11.8 12.8 12.7 14.3 12.9 18.4Avg # of Loans 150 151 149 178 125 64Property Type

Top 10 Loans (%) 44 44.5 45.6 41.8 48.7 53Office (%) 34 33 35 32 29 27Retail (%) 31 33 33 30 35 35Multi-family (%) 14 11 11 16 11 7Hotel (%) 9 10 10 10 9 13Industrial (%) 4 6 5 6 8 5

CreditAvg DSCR (NOI) 1.5 1.4 1.4 1.3 1.3 1.7Avg Orig LTV 68.0 68.7 68.8 70.4 68.1 63.4Avg Debt Yield 10.6 9.8 9.8 8.3 9.1 10.7

Performance30 DD 0.23 0.67 0.25 0.28 0.48 0.0560 DD 0.34 0.63 0.32 0.26 0.34 0.0690+ DD 0.65 0.91 0.96 2 2.31 0Foreclosure 1.13 1.58 1.24 2.3 1.55 0REO 4.06 4.98 3.78 4.8 4.53 0Non-Perf Ballon 0.21 0.49 0.43 0.26 0.3 0Total DQ 6.62 9.26 6.98 9.91 9.52 0.11

AmortizationFull IO % 24.0 25.6 27.7 53.8 42.5 12.4Partial IO % 45.6 48.0 47.4 31.8 42.7 23.0Total IO 69.64 73.59 75.04 85.65 85.17 35.42

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CMBX Market Quotes


• CMBX markets are quoted on Bloomberg frequently throughout the day on a buy / sell risk convention

• CMBX 1 – 5 are quotes on a price basis where as CMBX.6 is quoted on a spread basis.

• 11 broker / dealers trade CMBX

CMBX.6 Bid / Offer Markets CMBX.1 - 5 Bid / Offer Markets

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8


CMBX Market Flows & Mechanics

Source: Markit, Morgan Stanley Research

• CMBX belongs to the same index family as the indices for corporate CDS, the DJ CDX.

• Using the CMBX, one can either gain synthetic risk exposure to a portfolio of CMBS by "selling protection" or take a short position by "buying protection."

• The contract for the CMBX is designed to closely mirror the cash flow of the portfolio of cash CMBS bonds.

• CMBX uses the credit derivatives template specifically designed for structured finance securities, published by Internal Swaps and Derivatives Association (ISDA). This specific CDS format is called "pay-as-you-go (PAUG)," which involves ongoing, two-way payments over the life of a contract between the buyer and the seller of protection.

• The upfront fee is equal to “1 minus the dollar price of the tranche”.

• The Fixed premium is paid monthly based upon Actual / 360 day count convention

Upfront FeeFixed Premium

Fixed PremiumPrincipal Writedown

Shortfall / Principal Recoveris

Payment Schedule

Protection Buyer / Index Seller

(Short Risk)

Protection Seller / Index Buyer

(Long Risk)

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9


CMBX Market Flows & Mechanics


Trade Date Prices Are Lower than Par Prices are Higher than Par

Trade Initiation • 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

• 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

Trade Termination • 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

• 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

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On-Going Floating Rate Payments & Reimbursements


• These trigger events are called "Floating Amount Events" and generally include:

• Interest shortfalls and principal writedowns in a CMBS may be reimbursed in subsequent periods. When this occurs, the protection buyer must repay the amount previously received from the protection seller.

• The amount of this reimbursement is called an "Additional Fixed Payment.“

.

Trigger Description

Write-down • A write-down can occur as defaulted loans are liquidated and the realized losses reduce the principal amount of a bond.

Interest Shortfall • An interest shortfall occurs when the interest passed through from the underlying mortgage loans is less than the interest to be paid on the security.

• The amount of interest shortfall is calculated as the difference between the expected interest payment and the actual interest payment paid on the reference obligation.

• Shortfall payments are limited to the amount of the fixed premium.

Principal Shortfall / Failure to Pay Principal

• This event occurs if the reference CMBS fails to pay off principal by its legal final maturity or the final amortization date (i.e., when the collateral assets supporting the reference obligation are fully liquidated and distributed).

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Trading – XYZ Sells Protection of $100MM of CMBX.AAA.6


• These Fixed Rate Coupon on CMBX.AAA.6 is 50 bps per annum, payable monthly

• CMBX.AAA.6 is currently trading at a price of $95.45

Fixed Rate Payer = Protection Buyer = Index Buyer

Floating Rate Payer = Protection Seller = Index Seller

Upfront Payment • Pays $4.55MM Upfront Fee to the Counterparty • Equal to the difference between $100 and $95.45

• Receives $4.55MM Upfront Fee from the Counterparty • Difference Between $100 and $95.45

Fixed Premium • Pays 50 basis points per annum monthly to the counterparty on the notional amount

• Notional amount will decline over time based on the reference obligations amortizations and/or losses

• Receives 50 basis points per annum monthly from the counterparty on the notional amount

• Notional amount will decline over time based on the reference obligations amortizations and/or losses

Floating Rate Payments

• Receives Floating Payments in the event of a: • Interest Shortfall (capped at fixed rate) • Principal Shortfall • Write-down

• Pays Floating Payments in the event of a: • Interest Shortfall (capped at fixed rate) • Principal Shortfall • Write-down

Floating Rate Reimbursements

• Makes payment in the event of the following • Interest Shortfall Reimbursement Amount • Principal Shortfall Reimbursement Amount • Write-down Reimbursement Amount

• Receives payment in the event of the following • Interest Shortfall Reimbursement Amount • Principal Shortfall Reimbursement Amount • Write-down Reimbursement Amount

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Credit Event (Write-down) – XYZ Sells Protection of $100MM of CMBX.AAA.6


• Reference Obligation Original Factor = 1.0; Current Factor = 0.7

• A Write-down occurs on a Reference Obligation, for example, in year 3, in the amount of 15% of it’s current principal balance. Each reference obligation is 1/25th or 4% of the CMBX contract.

• (Current Factor * Weighting * Loss) = (0.70 * .04 * .15) = .0042% = 0.42%

• Protection Seller pays to Protection Buyer a floating amount (0.42% * $100MM) = $420,000

• Index notional amount on which premium is paid is reduced by 0.42%, in addition to the principal payments of the month

• Following the Floating Rate Payment Event, protection seller receives premium of 50 bps on the remaining index notional amount.

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Trade Confirmation & Settlement


• 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

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http://www.markit.com/


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Analysis of DTCC Data

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-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.0

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

CMBX.NA.AAA.1 CMBX.NA.AAA.2 CMBX.NA.AAA.3

CMBX.NA.AAA.4 CMBX.NA.AAA.5

Dealer Net Protection ($bn)

0.01.02.03.04.05.06.07.08.09.0

10.0

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

CMBX.NA.AAA.1 CMBX.NA.AAA.2 CMBX.NA.AAA.3

CMBX.NA.AAA.4 CMBX.NA.AAA.5

Total Outstanding Net Notional ($bn)

-0.3-0.2-0.10.00.10.20.30.40.50.60.70.8

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

CMBX.NA.AM.1 CMBX.NA.AM.2 CMBX.NA.AM.3

CMBX.NA.AM.4 CMBX.NA.AM.5


0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

CMBX.NA.AM.1 CMBX.NA.AM.2 CMBX.NA.AM.3

CMBX.NA.AM.4 CMBX.NA.AM.5


CMBX Net Positioning

Source: DTCC, Morgan Stanley Research

AAA Outstanding

AM Positioning AM Outstanding

AAA Positioning

12


16


-0.6-0.4-0.20.00.20.40.60.81.0

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

CMBX.NA.AJ.1 CMBX.NA.AJ.2 CMBX.NA.AJ.3

CMBX.NA.AJ.4 CMBX.NA.AJ.5


0.00.20.40.60.81.01.21.41.61.8

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

CMBX.NA.AJ.1 CMBX.NA.AJ.2 CMBX.NA.AJ.3

CMBX.NA.AJ.4 CMBX.NA.AJ.5


-0.5

0.0

0.5

1.0

1.5

2.0

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

CMBX.NA.AAA.6 CMBX.NA.AS.6 CMBX.NA.AA.6

CMBX.NA.A.6 CMBX.NA.BBB-.6 CMBX.NA.BB.6


0.00.51.01.52.02.53.03.54.0

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

CMBX.NA.AAA.6 CMBX.NA.AS.6 CMBX.NA.AA.6

CMBX.NA.A.6 CMBX.NA.BBB-.6 CMBX.NA.BB.6


CMBX Net Positioning

Source: DTCC, Morgan Stanley Research

AJ Outstanding AJ Positioning

CMBX 6 Positioning CMBX 6 Outstanding

13


17


Historical Pricing

14


18


Note: Range spans 1/30/2013 to current day. Yellow is latest price Source: Bloomberg, Morgan Stanley Research

97.6

96.6

95.0

95.0

95.4

99.4

99.0

98.2

98.4

98.1

99.3

99.0

98.2

98.4

98.1

AAA.1

AAA.2

AAA.3

AAA.4

AAA.5

CMBX.AAA

95.4

91.7

86.8

86.1

87.0

98.9

97.5

94.4

93.3

92.7

98.8

97.5

94.0

93.1

92.7

AM.1

AM.2

AM.3

AM.4

AM.5

CMBX.AM

89.7

81.6

66.3

65.7

66.5

96.2

91.0

79.7

78.6

78.2

96.2

89.3

76.4

76.7

77.3

AJ.1

AJ.2

AJ.3

AJ.4

AJ.5

CMBX.AJ

75.4

59.0

29.0

37.1

45.7

84.4

71.2

40.7

47.0

53.8

80.9

65.1

36.3

47.0

53.8

AA.1

AA.2

AA.3

AA.4

AA.5

CMBX.AA

56.4

29.2

13.4

22.5

26.3

68.7

38.0

18.8

26.4

33.9

62.4

31.4

15.3

26.4

33.9

A.1

A.2

A.3

A.4

A.5

CMBX.A

93.6

93.8

94.2

93.1

86.7

86.4

98.1

99.9

101.4

102.5

101.0

101.5

97.4

98.7

99.1

99.5

98.3

97.6

AAA.6

AS.6

AA.6

A.6

BBB-.6

BB.6

CMBX.6

CMBX Price Trends

15


19


CMBX Price Trends

Source: Bloomberg, Morgan Stanley Research

AM

AJ CMBX.6

AAA

93

94

95

96

97

98

99

100

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

AAA.1

AAA.2

AAA.3

AAA.4

AAA.5

AAA.6

Price

85

87

89

91

93

95

97

99

101

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

AM.1

AM.2

AM.3

AM.4

AM.5

AS.6

Price

65

70

75

80

85

90

95

100

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

AJ.1

AJ.2

AJ.3

AJ.4

AJ.5

Price

8587899193959799

101103105

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

AAA.6

AS.6

AA.6

A.6

BBB-.6

BB.6

Price

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Disclosure Section Collateralized mortgage obligations and other mortgage-related securities are not suitable for every investor and are subject to certain risks. The value and price of these securities is sensitive to conditions affecting the real estate market and the assets underlying these securities. Accordingly, changes in economic conditions, the value of underlying assets, credit conditions, interest rates, or other factors can cause these securities to diminish in value. In addition, residential mortgage-backed securities are subject to risks related to prepayment and clean-up call risk. When the obligations underlying these securities are prepaid at a faster pace than expected and the securities are called, an investor may have to reinvest in securities with a lower yield and/or fail to recover additional amounts (premiums) paid for securities with higher interest rates, resulting in an unexpected capital loss. The structure of these securities may be complex and less information may be available about them than other types of debt securities. The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., and/or Morgan Stanley Canada Limited. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Morgan Stanley Canada Limited and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please email [email protected] with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.

Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Richard Hill. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.

Important US Regulatory Disclosures on Subject Companies

The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

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Disclosure Section (Cont.) STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of December 31, 2013) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count % of Total IBC % of Rating Category

Overweight/Buy 1009 34% 315 38% 31% Equal-weight/Hold 1293 44% 395 47% 31% Not-Rated/Hold 103 4% 26 3% 25% Underweight/Sell 536 18% 97 12% 18% Total 2,941 833

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Disclosure Section (Cont.) Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. For Morgan Stanley specific disclosures, you may refer to www.morganstanley.com/researchdisclosures. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Matrix at http://www.morganstanley.com/matrix. Morgan Stanley Research is provided to our clients through our proprietary research portal on Matrix and also distributed electronically by Morgan Stanley to clients. Certain, but not all, Morgan Stanley Research products are also made available to clients through third-party vendors or redistributed to clients through alternate electronic means as a convenience. For access to all available Morgan Stanley Research, please contact your sales representative or go to Matrix at http://www.morganstanley.com/matrix. Any access and/or use of Morgan Stanley Research are subject to Morgan Stanley's Terms of Use (http://www.morganstanley.com/terms.html). By accessing and/or using Morgan Stanley Research, you are indicating that you have read and agree to be bound by our Terms of Use (http://www.morganstanley.com/terms.html). In addition you consent to Morgan Stanley processing your personal data and using cookies in accordance with our Privacy Policy and our Global Cookies Policy (http://www.morganstanley.com/privacy_pledge.html), including for the purposes of setting your preferences and to collect readership data so that we can deliver better and more personalised service and products to you. To find out more information about how Morgan Stanley processes personal data, how we use cookies and how to reject cookies see our Privacy Policy and our Global Cookies Policy (http://www.morganstanley.com/privacy_pledge.html). If you do not agree to our Terms of Use and/or if you do not wish to provide your consent to Morgan Stanley processing of your personal data or using cookies please do not access our research. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell any security/instrument or to participate in any trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments.

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Disclosure Section (Cont.) The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons. With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A.; in Japan by Morgan Stanley MUFG Securities Co., Ltd. and, for Commodities related research reports only, Morgan Stanley Capital Group Japan Co., Ltd; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research); in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Indonesia by PT Morgan Stanley Asia Indonesia; in Canada by Morgan Stanley Canada Limited, which has approved of and takes responsibility for its contents in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the US by Morgan Stanley & Co. LLC, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulatory Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Morgan Stanley Private Wealth Management Limited, authorized and regulated by the Financial Conduct Authority, also disseminates Morgan Stanley Research in the UK. Private UK investors should obtain the advice of their Morgan Stanley & Co. International plc or Morgan Stanley Private Wealth Management representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited.

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Disclosure Section (Cont.) The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley bases projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on public information. MSCI has not reviewed, approved or endorsed these projections, opinions, forecasts and trading strategies. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. Morgan Stanley Research or portions of it may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request. 1-7-14 po

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