Credit Risk and Bank Margins in Structured Financial Products
Structured Credit As Portfolio Management Tool
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Transcript of Structured Credit As Portfolio Management Tool
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Structured Credit As Portfolio Management Tool
The Primary Analyst(s) identified above certify that the views expressed in this report accurately reflect his/her/their personal views about thesubject securities/instruments/issuers, and no part of his/her/their compensation was, is or will be directly or indirectly related to the specific views orrecommendations contained herein.
This report has been prepared in accordance with our conflict management policy. The policy describes our organizational and administrativearrangements for the avoidance, management and disclosure of conflicts of interest. The policy is available at www.morganstanley.com/institutional/research.
Please see additional important disclosures at the end of this report.
Primary Analyst: Peter PolanskyjMorgan Stanley & Co. IncorporatedNew York: [email protected]
2Please see additional important discl osures at the end of this report.
Evolution of the Structured Credit Market
2004Moody's adopts correlationmodels for rating syntheticCDOs
Industry standard Dow JonesCDX index introduced
Fitch introduces correlationmodel
Synthetic CDO-Squareds -regular issuance begins
Synthetic HY index tranches
begin tradingMarket adopts base correlation asa standard
Correlation model on Bloombergintroduced (CDSM)
First pure HY synthetic CDOs
Cash CDO issuance tops $100 Bn
Basel II published -regulatorycapital treatment for CDOs
Delta-adjusted bespoke issuance$300 Bn
Spread
(bp)
0
200
400
600
800
1000
1200
1998First IG cashflowCBO(Travelers Funding)
Russian default causes turmoilin EM CDOs
2002Synthetic Tracers launched
FASB addresses consolidationissues relating to SPEs
HY default rates peak at 10.4%for this cycle
First managed synthetic CDO
Largest managed syntheticCDO ($4.5 billion)
First hedge fund CFO
Regular issuance of HY CBOsends in favor of CLOs
Regular issuance of IG CBOsends in favor of synthetics
2002 the only down year forarbitrage CDO issuance
$280 billion notional creditrisk referenced in syntheticstructures
2000IG cashflowCBOs- regularissuance begins
First arbitrage syntheticCDOs
Structured finance CDOs -regular issuance begins
First trust preferred CDO
Default correlation modelsgain popularity
FAS 133 becomes effective
1996Moody's introduces BinomialExpansion model for CDOratings
First balance sheet CLO
HY Loans -regular use inCDOs
Annual arbitrage CDO issuancetops $10 billion
Investment Grade
High Yield
Emerging Markets
2006Leveraged loan CDSstandards emerge
SFAS 155 introduced,increasing US insurance co.and bank involvement
1997EM CDOs- regular issuance
begins
First synthetic balance sheetCDO
1999Synthetic balance sheet CDOs -regular issuance
First European HY CBO(EuroCredit)
Annual arbitrage CDO issuancetops $50 billion
2001First distressed debt CDO
Popular press addresses defaultsin HY CBOs
S&P adopts correlation modelsfor rating synthetic CDOs
1995HY CBOs- regular issuance
begins
First sovereign EM CDO
2003Portfolio liquidation gives
birth to an active cash CDOsecondary market
Synthetic TRACX Indexintroduced (100 names)
Synthetic IG index tranchesbegin trading
First structured credit hedgefunds emerge
$950 billion notional creditreferenced in syntheticstructures
2005Auto sector stress spurs sell-off in index equity tranches
Collins & Aikman bankruptcy 1st industry-widesettlement
Levered super senior products gain popularity
Delta Air Lines and Northwest file for bankruptcy withinminutes of each other
Delphi 1s t significant fallen angel default since 2002, inover 800 S&P rated synthetic CDOs
Hybrid cash/synthetic ABS CDOsgain popularity
High leveraged loan recoveries keep CLO ratings stable
S&P introduces significant changes to ratings model
Forward starting, self managed and CPPI structures emerge
Delta-adjusted bespoke issuance $600 Bn
Cash CDO issuance tops $250 Bn
2004Moody's adopts correlationmodels for rating syntheticCDOs
Industry standard Dow JonesCDX index introduced
Fitch introduces correlationmodel
Synthetic CDO-Squareds -regular issuance begins
Synthetic HY index tranches
begin tradingMarket adopts base correlation asa standard
Correlation model on Bloombergintroduced (CDSM)
First pure HY synthetic CDOs
Cash CDO issuance tops $100 Bn
Basel II published -regulatorycapital treatment for CDOs
Delta-adjusted bespoke issuance$300 Bn
Spread
(bp)
0
200
400
600
800
1000
1200
1998First IG cashflowCBO(Travelers Funding)
Russian default causes turmoilin EM CDOs
2002Synthetic Tracers launched
FASB addresses consolidationissues relating to SPEs
HY default rates peak at 10.4%for this cycle
First managed synthetic CDO
Largest managed syntheticCDO ($4.5 billion)
First hedge fund CFO
Regular issuance of HY CBOsends in favor of CLOs
Regular issuance of IG CBOsends in favor of synthetics
2002 the only down year forarbitrage CDO issuance
$280 billion notional creditrisk referenced in syntheticstructures
2000IG cashflowCBOs- regularissuance begins
First arbitrage syntheticCDOs
Structured finance CDOs -regular issuance begins
First trust preferred CDO
Default correlation modelsgain popularity
FAS 133 becomes effective
1996Moody's introduces BinomialExpansion model for CDOratings
First balance sheet CLO
HY Loans -regular use inCDOs
Annual arbitrage CDO issuancetops $10 billion
Investment Grade
High Yield
Emerging Markets
Investment Grade
High Yield
Emerging Markets
Investment GradeInvestment Grade
High YieldHigh Yield
Emerging MarketsEmerging Markets
2006Leveraged loan CDSstandards emerge
SFAS 155 introduced,increasing US insurance co.and bank involvement
1997EM CDOs- regular issuance
begins
First synthetic balance sheetCDO
1999Synthetic balance sheet CDOs -regular issuance
First European HY CBO(EuroCredit)
Annual arbitrage CDO issuancetops $50 billion
2001First distressed debt CDO
Popular press addresses defaultsin HY CBOs
S&P adopts correlation modelsfor rating synthetic CDOs
1995HY CBOs- regular issuance
begins
First sovereign EM CDO
2003Portfolio liquidation gives
birth to an active cash CDOsecondary market
Synthetic TRACX Indexintroduced (100 names)
Synthetic IG index tranchesbegin trading
First structured credit hedgefunds emerge
$950 billion notional creditreferenced in syntheticstructures
2005Auto sector stress spurs sell-off in index equity tranches
Collins & Aikman bankruptcy 1st industry-widesettlement
Levered super senior products gain popularity
Delta Air Lines and Northwest file for bankruptcy withinminutes of each other
Delphi 1s t significant fallen angel default since 2002, inover 800 S&P rated synthetic CDOs
Hybrid cash/synthetic ABS CDOsgain popularity
High leveraged loan recoveries keep CLO ratings stable
S&P introduces significant changes to ratings model
Forward starting, self managed and CPPI structures emerge
Delta-adjusted bespoke issuance $600 Bn
Cash CDO issuance tops $250 Bn
Source: Morgan Stanley
Investment Grade
High Yield
Emerging Markets
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3Please see additional important discl osures at the end of this report.
Jan-07
200730 year CDS gainsmomentum in corporatecredit
1997Long form confirmationdocument, previously tradeterms were individuallynegotiated
Asian crisis increased CDSvolumes
Indonesia debtrescheduling - motivatedworking groups to discussstandardization
First balance sheetsynthetic CDO
Dec-96 Jan-98
1999ISDA Publishes 1999Credit DerivativesDefinitions (firstcomprehensivemarket standard)
Jan-00Jan-99
2001Modified restructuring,motivated by Conseco
Railtrack bankruptcy,dispute over deliverabilityof convertible bonds,established standards
Enron bankruptcy - largevolume reference entityand counterparty
Argentina default
Jan-02Jan-01
2003TRACX indices(100 names) introduced
IBoxx indices introduced
Parmalat default, largereference entity
ISDA 2003 definitionspublished
Jan-04Jan-03
2005ISDA published template forCDS on ABS
Collins & Aikman bankruptcy 1st ISDA-coordinated industry-wide CDS settlement
Delphi bankruptcy 1stsignificant fallen angel defaultsince 2002, large operationaltest for the market
Delta Air Lines and NorthwestAirlines file for bankruptcy onthe same day
Calpine Bankruptcy ISDAproposes solution to deliverableconvertibles debate through avote
Recovery locks gain acceptance
Jan-06Jan-05
0
50
100
150
200
250
300
1998Russia default,showedshortcomingsof long formconfirmation
2002HY trailing default ratepeaks for this credit cycle at10.4%
CDSW pricing model introducedon Bloomberg, increasedtransparency
DTC trade matching increasedliquidity
WorldCom bankruptcy, largevolume reference entity
Obligation acceleration andrepudiation/moratorium droppedas credit events for corporates
CFMA requires CDS to becovered by anti-fraud provisions
Xerox restructuring
Standardized quarterly enddates begin trading
Alan Greenspan praises CDS forspreading credit risk throughoutfinancial system
Synthetic TRACERS index (50names) introduced
2000First arbitrage syntheticCDO
Conseco restructuring
Armstrong default resulted inreference entitydisagreement betweencounterparties
2004CDX index family becomesstandard
Basel II regulatory relief forCDS without restructuring
2006ABX standardizedindices on US sub-primehome equity begintrading
Complex restructuringscreate CDS successionand deliverability issues
ISDA standardizes USLCDS contract
ISDA standardizes CDOCDS contract
LevXLCDS indexlaunches in Europe
CDS basis turnsmeaningfully negative inmost corporate creditmarkets
CPDO products pushCDX and iTraxx indicesmeaningfully tighter
IG
CorporateSpread(bp)
Evolution of the Credit Derivatives Market
4Please see additional important discl osures at the end of this report.
How Big Is the Synthetic Structured Credit Market?
Credit Risk (Delta Adjusted)Portfolio StyleSpecified Currency
of NotionalNotional
1,554,440450,2002006
635,19538%28%34%68%32%38%56%340,477265,35675,1212005
338,55324%51%25%63%37%51%43%120,70481,05939,6452004
TotalSenior +
Super SeniorMezzanineEquityStaticManagedEURUSDTotalUnfundedFundedVintage
One of the most technical markets in the world. Understanding the supply/demand structure is
of crucial importance.
Tremendous growth over the past 3 years
Clear themes in capital structure, currency and maturity
Creditflux data based on dealer contributions and likely covers two-thirds of the market. Data
excludes the traded index tranche market.
Source: Morgan Stanley, Creditflux
Structured Credit Market Summary Bespoke Issuance ($ MM)
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5Please see additional important discl osures at the end of this report.
And Cash? - Structured Finance/CLOs Dominate 2006 Issuance
Source: Morgan Stanley
In USD million
2007 J an -Feb 2006 2006 2007 J an -Feb 2006 2006 2007 Jan -Feb 2006 2006
High Grade ABS 15,116 7,242 120,293 13,758 7,242 117,832 1,359 - 2,461Mezzanine ABS 16,066 6,403 61,704 16,066 6,038 59,472 - 364 2,232CMBS/REIT Debt 4,171 3,118 31,787 4,171 3,118 30,395 - - 1,232Other SF 5,140 1,325 20,463 3,781 1,295 18,741 1,359 30 1,677Total SF CDOs 40,493 18,088 234,246 37,775 17,694 226,440 2,718 394 7,602
CLOs 16,851 9,485 154,037 14,577 6,849 90,706 2,274 2,636 60,203Middle Market CLOs 16,620 3,424 56,826 1,846 2,467 18,199 14,773 328 37,208Synthetic Corporate Credit CDOs 4,023 3,290 19,167 2,622 402 8,844 1,340 2,694 9,147Trust Preferred CDOs 537 1,754 15,005 537 1,754 14,622 - - 383Other 2,319 6,582 21,421 455 3,518 13,295 506 2,797 6,009
Total 80,842 42,622 500,702 57,812 32,684 372,106 21,611 8,850 120,552
Global CDOs US Europe
6Please see additional important discl osures at the end of this report.
Lots of Forms of Credit OutstandingAlways key in t his envi ronment to d iff erent iate among corpor ate, resi dent ial, commerci al creditmarkets and vehicles. Some statistics more problematic than others.
CLO notional outstanding - $0.4 tn$0.5tnUS Levered Loans
US LBOs in 2006 - $0.2tn$0.2tnPrivate Equity Uninvested Capital
RMBS outstanding - $5.5 tn$10 tnUS Residential Mortgage Market
CMBS outstanding - $0.8 tn$500 bn securitized in 2006
Bespoke CDO risk outstanding - $3 tn
HY unsecured collateral no longer packaged
CBOs no longer actively issued/traded
Structured Market Size & CommentUnderlying Market
$20 tnCorporate Credit Derivs
$1 tnSubprime Mortgage Market$3 tnUS Commercial Mortgage Market
$1 tn
$4 tn
$17 tnUS Equities
High Yield Bonds
Investment Grade Bonds
US Corporate Credit
Putting Some Size to the Markets
Source: Morgan Stanley Research
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7Please see additional important discl osures at the end of this report.
What Does Bespoke Really Mean?
Investment grade portfolio management
may be at an important crossroads today
Basel II and FASB proposals are very
supportive of taking credit risk in structured
form
Further, large corporate bond portfolios are
in need of tools to implement macro
strategies
So, what does bespoke really mean?
The US credit environment is becoming
more inviting to taking customized
structured credit solutions, taking a pagefrom Europe
Morgan Stanley 2006
8Please see additional important discl osures at the end of this report.
Banks and Basel II
Basel II has already had profound
implications on credit investing
Based on ratings approaches, risk
weightings fall dramatically, making
structured credit solutions fairly efficient
from a regulatory capital perspective
We see the impact of this event already on
senior tranche spread and record cash and
synthetic CDO issuance
12%
50%
50%
A
20%
50%
50%
A-
35%
100%
100%
BBB+
60%
100%
100%
BBB
100%
100%
100%
BBB-
10%8%7%
CDO Tranche
(Super Senior X-100%)
50%20%20%CDO Tranche
50%20%20%Corporate Bonds
A+AAAAA
Source: Morgan Stanley, Basel II. Assumes RBA Approach
Basel II Risk Weightings Favor Structured Credit
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9Please see additional important discl osures at the end of this report.
Insurance and FASB
FASB guidelines related to changes in
MTM practices may represent a secular
shift in the use of synthetic structured credit
SFAS 155, Accounting for Certain Hybrid
Financial Instruments (2/06)
CLNs issued from an SPE are accounted
for similar to conventional corporate
bonds
No bifurcation of an embedded credit
derivative
To not MTM the underlying credit
derivative, an investor must not consolidate
SPE
100% ownership of QSPE (static or rules
based)
Up to 50% for actively managed
The following information contains a general, summary
discussion of certain select accounting issues. Any suchdiscussion is necessarily generic and may not be
applicable to or complete for any particular investors
specific facts and circumstances. Morgan Stanley is not
offering and does not purport to offer accounting advice
and this information should not and cannot be relied upon
as such. Morgan Stanley has prepared this information
based on our understanding of the issues following review
of materials prepared by third party accounting experts.
The positions of such third party experts may be reasoned
and the views of other third party experts may differ from
those summarized herein. Potential investors are urged to
consult their own accounting advisors before making any
investment decisions regarding any transaction.
10Please see additional important discl osures at the end of this report.
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Global Corporate CreditDerivatives = 3.6x Cash Markets
Total Corporate Credit Notional Outstanding ($b)
Source: BIS, ISDA
Global Corporate Cash Credit Global CDS Market
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11Please see additional important discl osures at the end of this report.
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
USD Rates
Derivatives = 10.7x Cash Markets
Total US Government Debt Notional Outstanding ($b)
Source: BIS, ISDA
US Government Debt Securities USD Interest Rate Swap Notional
Innovation As a Driver Of Markets
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13Please see additional important discl osures at the end of this report.
Innovation As a Driver of Markets
2005 Levered Super Senior
2006/7 Equity in Fashion; Watch the Styles
CPDO Friend or Foe?
Innovation in ABS CDOs
ABX TABX
2007 Morgan Stanley
14Please see additional important discl osures at the end of this report.
Levered Super Senior Showed The Potential in 2005
Most important 2005 theme is the interplay
of equity and super senior, as the middle
has been much more stable
Supersenior pricing on investment grade
pools widened by 8-10 bp from starting
levels in the single to low double digit
range
Levered super senior products were a big
part of why spreads came rallying back in
late 2005
Implied Super Senior PricingFollows Actual Pricing
Implied 30-100% Spread (bp)
-10
-8
-6
-4
-2
0
2
4
6
8
Oct-04 Jan-05 Mar-05 Jun-05 Aug-05 Nov-05 Jan-06
5yr DJ CDX 10yr DJ CDX
CDX 3-4 Roll CDX 4-5 Roll
Source: Morgan Stanley
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15Please see additional important discl osures at the end of this report.
0
5
10
15
20
25
30
Oct-
03
Apr-
04
Oct-
04
Apr-
05
Oct-
05
Mar-
06
Sep-
06
Mar-
07
Equity Products Reiterated The Potential in 2006
On-the-Run IG CDX 5-Year 0-3% Correlation
Source: Morgan Stanley
Despite much higher credit volatility, there
have been strong equity tranche flows
Non-traditional equity products have been
the main drivers
POs are very popular and are good ways
to play default risk when timing is
uncertain
IOs are better suited for a new-term low
default environment
Rated equity structures are based on the
excess spread framework and have the
characteristic of initial ratings being
sensitive to market levels
Spring 2005 -Repricing withAuto Stress
Spring 2006 -Equity POsGain Popularity
16Please see additional important discl osures at the end of this report.
Rated Equity Rationale
How Does Excess Spread Cover Lossesfrom Default?
Source: Morgan Stanley, Moodys. Note: 5-year excess spreadassumes that the notional is written down evenly over five years basedon Moodys 5-year losses.
Rating agency perspective
Excess spread provides enough coverage
for losses over time to warrant an
investment grade rating
Wider all-running premiums on equity
can result in higher ratings at initiation,
all else being equal
Market perspective
Rated equity provides absolute price
support for equity risk
Agencies do not assign a big weight for
JTD in IG; clearly this is a risk factor
45.3%5-year Excess Spread
Baa Portfolio
38.3%5 Year Excess Spread
10.0%Annual Excess Spread
38.87%Loss as % of 0-3% Tranche
1.17%Moody's 5-year Loss
10.0%Annual Excess Spread
15.80%Loss as % of 0-3% Tranche
0.47%Moody's 5-year Loss
IG Portfolio
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17Please see additional important discl osures at the end of this report.
CPDO Friend or Foe?
CPDOs have seized a disproportionate
amount of investor mindshare
There is a perception problem, since the
technology is nearly 100% associated
with just one example of its application
We have some issues with the original
index product, based on rebalancing risk
within the indices and mean-reversion
assumptions
We find other strategies much more
appealing, including managed structuresand tranches
Investment Strategy Indices Managed Portfolios Curves Strategies Long/Short Strategies Tranches
Leverage Process Trade NAV Portfolio PV Limits & Cash In Levels
Risk Management Gap Risk Cash Out Trigger
Fees
Credit Linked Note Stable Coupons/Principal Ratings
18Please see additional important discl osures at the end of this report.
A CPDO Problem Rebalancing Risk
1.1 bp0.15 bp0.04 bpCitigroupBIGCredit
4.5 bp0.71 bp-0.03 bpBBB
-1.2 bp-0.22 bp0.03 bpA
-2.0 bp-0.34 bp0.00 bpAAA/A A
Avg Si x-Mont hSpread
WideningDue to
Rebalancing
Avg Mo nth lySpread
ChangeDue to
Rebalancing
Avg Mo nth lySpread
Change ofIndices
CorporateBondSector
Measuring Index Rebalancing Risk (bp)
Source: Morgan Stanley, Yield Book.Note: Based on Citigroup BIG Credit Index monthly data starting in
December 1994. Spread widening is based on OAS and isdue to rebalancing imputed from monthly excess returns ofthe indices.
Average One-Year Rati ng Migrat ions,1970-2006 (%)
Source: Moodys
4.480.180.020.220.804.3984.724.930.210.05Baa
3.700.020.000.020.100.514.9588.102.550.06A
3.930.010.000.000.020.060.287.0487.840.83Aa
2.990.000.000.000.000.020.000.677.5088.82Aaa
WRDefaultCa-CCaaBBaBaaAAaAaaCohortRating
End of Period Rating
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19Please see additional important discl osures at the end of this report.
CPDO Roll and MTM Risk
0%
20%
40%
60%
80%
100%
0% 2% 4% 6% 8%
0
2
4
6
8
10
Cash-in ProbabilityAverage Time to Cash-in
Impact of Rebalancing Risk on Performance
Cash-in Probabil it y T ime to Cash- in (years)
Cash-in Probability Recovery
Rebalancing impact (% of spreads)
0%
20%
40%
60%
80%
100%
0% 2% 4% 6% 8%
60%
70%
80%
90%
100%
Source: Morgan Stanley
Rebalancing impact (% of spreads)
Cash-in ProbabilityRecovery
CPDO MTM Risk: Distribution of
Worst NAVs
95-100
>70 75-80
85-90 90-95
80-8570-75
10%
12%
17%
14%
18%
15%
20%
22%
11%
22%
14%
6%7%
1% 3%10%
24%
49%
2%5%6%
10%11%
16%
21%
23%
8%
17%
2%
30%
25%
1%
29%
18%
0% 2% 4% 6% 8%
Source: Morgan Stanley
Distribution
Rebalancing impact (% of spreads)
20Please see additional important discl osures at the end of this report.
CPDO Bullish or Bearish Trade?
Single-name products perform best in
modestly bearish environments
Curve strategies based on steepeners
are interesting given the theme that
forwards do not get realized but timing
is not great
CPDO on senior tranches is very
interesting but the agencies are not
ready to rate yet
There is a natural analogy with LSS91%5.1596.3%25bp
91%5.2797.8%29bp
98%6.0699.9%50bp
-6.38100.0%60bp
-6.58100.0%70bp
-6.81100.0%80bp
Recovery
Averag e Cash-in Period
(Years)Probabilityof Cash-in
MeanSpreadLevel
Modestly Wider Spread EnvironmentsFavor CPDOs
Source: Morgan Stanley
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21Please see additional important discl osures at the end of this report.
Some Recent Innovations in ABS CDOs
Interest Diversion Tests (BBB Turbo)
Typically paid after a coupon to the equity. Interest proceeds that would go to the equity are used to pay down
the balance of the BBB tranche. This shortens the WAL of the tranche and provides additional cashflows early
in the deals life
Pro-rata paydown of the principal waterfall for mezzanine deals
First introduced in high grade deals, a pro-rata paydown allows all classes of rated notes to be paid down in
proportion to their outstanding balances provided there has never been a breach of a coverage test and a certain
portion of the collateral balance is outstanding. This prevents the cost of funds from increasing as the deal
delevers and so boost the equity returns, and also shortens the WAL of mezzanine tranches
Synthetic Assets
Synthetic ABS assets have become more widespread as the market has standardized and the ISDA ABS
synthetic confirm was released in June 2005. This allows the manager to select from a wider range of assets than
the current new issue market
Hybrid Structures
Hybrid structures allow collateral to be sourced in cash or synthetic form
22Please see additional important discl osures at the end of this report.
ABX and TABX Whats in it?
ABX Based on 20 underlying subprime home equity ABS transactions.
Indices with ratings AAA, AA, A, BBB, and BBB- are created to
reference the difference tranches in each of these 20 transactions. New
series of the index are created every six months; so far three series have
traded: ABX 06-1, 06-2 and 07-1
Recent volatility has been almost entirely confined to the BBB and BBB-
classes
Tranched ABX (TABX) launched on February 14, 2007. Two sets of
tranches will trade, referencing BBB and BBB-. Each of these, in turn, will
reference the 40 securities resulting in combining ABX 06-2 and ABX 07-1
While tranche trading has become a highly liquid and commoditized product
in corporate credit, TABX is a long way away from this status.
Concepts of Delta and Implied Correlation fraught with complications
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23Please see additional important discl osures at the end of this report.
But More Diversity in ABS CDOs Ratings, Vintage, etc
1%
4%
1%
4%
5%
17%
14%
11%
8%
4%
3%
6%
26%
4%
17%
17%
80%
65%
35%
37%
15%
11%
0%NA
1%B and lower
0%BB-
Ratings Compositi on of Select 2006 Mezzanine ABS CDOs
2%BB
4%BB+
37%BBB-
33%BBB
14%BBB+
5%A
3%AA
1%AAA
Std DevMaximumAverageRating
Recall t hat ABX/TABX is either 100% BBB-, or 100% BBB and 2006 Collateral
Source: Morgan Stanley, Intex
Structured Credit Applications Secured andUnsecured Corporate Credit
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25Please see additional important discl osures at the end of this report.
Who Puts the L in LBOs?
Much of the L in LBOs is
furnished by leveraged loan market
CLO market has become the
primary support mechanism for
leveraged loans
Both US and European CLO
portfolios have significant and
growing exposure to LBOs
Risk implications of LBO exposure
vary significantly across CLO
tranches
What if Atlas shrugs?Inverted Investment Pyramid
$1.1 Trilli on High Yield Market
$480Bn L evered Loan Market
$125Bn Private Equity
Uninvested
Capital
$30-35Bn
~$250Bn CLO Market
CLO, Mezz & Equity
26Please see additional important discl osures at the end of this report.
Private Equity Hunting Grounds
AA
A
BBB
BBB
BBBBBB
BB
BB
BB
BBB B
BCCC
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006
BBBs Increasingly the LBO Hunting Ground
Top 20 LBO Deals
Note: Looks at the top 20 LBO deals each year as measured by total invested capital, and takes the S&P rating before thedeal was announced.
Source: Morgan Stanley, FactSet
Cheaper valuation mu ltipl es and PE consor tium deals keep BBBs a target
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27Please see additional important discl osures at the end of this report.
The Top-Heaviness Problem
0
5,000
10,000
15,000
20,000
25,000
30,000
Mar-03
Jun-03
Sep-0
3
Dec-0
3
Mar-04
Jun-04
Sep-0
4
Dec-0
4
Mar-05
Jun-05
Sep-0
5
Dec-0
5
Mar-06
Jun-06
Sep-0
6
Dec-0
6
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Source: Morgan Stanley Source: Morgan Stanley, S&P LCD
Private Issuance Volume Leverage
Other, 6%
Senior Debt,59%
FY 2003 1H06
Sub Debt,17%
Senior Debt,37%Equity,
39%
Other, 1%
SubDebt,7%
Equity,33%
Volume($MM)
Leverage(x)
All th ings being equal , recover ies wi ll be lower in the next defaul t cycle
More L in LBOs Less Pie for Subordinated Bondholders
28Please see additional important discl osures at the end of this report.
Endless CLO Bid?
Source: Morgan Stanley
2006 global CLO issuance amounted to
$154 billion, more than two times entire
2005 issuance
Continued strong ratings performance
142 upgrades and 25 downgrades over the
last 32 months. Only two downgrades in
European CLOs. Bulk of the ratings
unchanged
Loan recoveries remain high even as
corporate defaults rise
Basel II regulatory capital regime favors
CLOs
0
20
40
60
80
100
120
140
160
180
2000 2001 2002 2003 2004 2005 2006 2007
YTD
USD Euro Other
Growth in Global CLO Issuance
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29Please see additional important discl osures at the end of this report.
Loan CDS Just in Time?
SPL (Spread per Unit of Leverage ) is a
Morgan Stanley measure akin to a new
issue P/E for credit products
While leveraged loans may be more
attractive than high yield bonds given
valuations, absolute valuations have come a
long way
Additionally, LCDS premiums optically
trade well inside leveraged loan spreads
This stands in stark contrast to the early
days of the unsecured bond and ABS CDS
markets in which premiums were
significantly wider than their cashcounterparts
0
50
100
150
200
250
Dec-98 Nov-00 Sep-02 Jul-04 May-06
Source: Morgan Stanley, S&P LCD
Leveraged Loan Market SPL
Average: 111Max: 206Min: 52
Monthly Loan SPL
30Please see additional important discl osures at the end of this report.
Hedging Isnt Just for Gardeners
Curve flatteners using indic es or singlenames. Flatteners are tough trades from acarry/rolldown perspective today, but they arecheap default hedges, compared to owningoutright protection.
True forward starting tranches. Tranchesthat forward start with a guaranteed amountof subordination are trades that perform wellwhen there are near-term defaults, but arelong credit risk trades.
Variable cost struct ures. Motivated byBasel II but with broader applications, there
are many zero-cost type protectionsolutions, where protection premiums startout very low and rise quickly with defaults.Unlike other strategies, variable coststructures benefit from defaults occurringlater in the cycle.
Junior m ezzanine protection in unsecuredHY. We feel that when the credit cycle turns,unsecured high yield will be the first shoe todrop, and the technicals support this trade aswell, given a lack of strong structured creditflow from the long side.
Principal protected hedging s trategies. Forinvestors who are not able to hold protectionoutright, principal protected strategies wherezero-coupon risk-free assets are mixed withall-upfront positions in tranche protection canbe combined to create zero-coupon principalprotection that has upside if losses aretriggered in the tranche.
2nd-to-Default Baskets on financials. We
focus on financials, where 2nd-to-defaultexposure appears to be a lower costalternative to hedge the industrys inherentsystemic characteristics.
OTM payer options in indices . Whileimplied volatility has moved significantlyhigher, options on the indices provide astrategy not subject to many of the technicalsthat influence tranche pricing.
Hedging Default Risk Hedging Systemic Risk
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31Please see additional important discl osures at the end of this report.
The Case For Hedging Loan Exposures
Sub-prime housing and concomitant fears of the credit cycle turning are
beginning to be reflected in re-pricing of risk premia in corporate credit
markets
Wide ranging interest investors with exposure to loans through CLO
tranches, funds with loan exposures through private equity sponsored
transactions financed through leveraged loans
Leveraged loans have furnished the L in LBOs, and CLO portfolios are the
primary support mechanisms for leveraged loans
LBO capital structures are loan-heavy. If the next set of defaults were to
come from LBO names, loan recoveries can be significantly lower than
historical experience
Exploding covenant-lite volumes do not bode well for loan recoveries
Substantial overlap of obligors and sectors across CLO portfolios
32Please see additional important discl osures at the end of this report.
CLO Exposure to LBOs and Covenant-Lite Loans
Distribution of LBO Exposure in 2006CLO Portfolios
0%
5%
10%
15%
20%
25%
30%
35%
5.0%-
7.5%
7.5%-
10.0%
10.0%-
12.5%
12.5%-
15.0%
15.0%-
17.5%
17.5%+
Distribution of Covenant-Lite Loansin 2006 CLO Portfolios
Source: Morgan Stanley Research
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0%-2% 2%-4% 4%-6% 6%-8% 8%-10%
10%+
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33Please see additional important discl osures at the end of this report.
CDS on CLOs: A New Arrow in a Hedgers Quiver
The broad chassis of ABS CDS also applies to cash CLOs (specific reference
obligation, amortization of notional, PAUG mechanics) but there are a few
key differences
A Better Fit for Hedging Loans:
Significant overlap of obligors across CLO portfolios
CLOs have sizeable second lien and unsecured bond buckets
PIK-ability of mezzanine tranches is helpful
Callability of CLOs. Protection when needed
At the moment, scale of transactions is a constraint.
What Is Correlation Trading CorporatesVersus ABS
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35Please see additional important discl osures at the end of this report.
Correlation and Minefields
LowCorrelation
HighCorrelation
36Please see additional important discl osures at the end of this report.
Correlation Intuition
Senior Tranches Subordinate Tranches
0
100
200
300
400
0% 20% 40% 60% 80% 100%
Correlation measures how risk is
distributed among tranches
Subordinate tranches
Spread decreases as correlation rises
Senior tranches
Spread increases as correlation rises
Source: Morgan Stanley
Fundamental Correlation Relationships
bp
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37Please see additional important discl osures at the end of this report.
Correlation Intuition Large Baskets
Each tranche resides somewhere on a
correlation sensitivity spectrum, ranging
from very long (3-7%) to very short (15-
30%)
For a given tranche, the level of correlation
sensitivity changes
When correlation changes
When spreads change
Spread (bp)
10% 20% 30% 40% 50% 60% 70% 80% 90%
3-7% 10-15% 15-30%7-10%
Correlation
Source: Morgan Stanley
Sensitivity of Four Tranches of DowJones CDX NA IG
38Please see additional important discl osures at the end of this report.
Hidden Meaning of Default Correlation in Credit Markets
0.9x0.7x1.5x1.0x1.1x0.1x0.6xCoefficientof Variance*
Moody'sA & Baa
Moody'sBaa
Moody'sA
1000Credits 20%Correlation
50Credits 20%
Correlation
1000Credits 0%Correlation
50Credits 0%Correlation
We have demonstrated that correlation affects the relationship between volatility and
portfolio size
We compare results from a 50-name and 1000-name portfolio with real world default
experience (using Moodys five year cumulative default statistics)
The volatility of expected losses for large portfolios is much greater for correlated
portfolios this is broadly consistent with real world default experience
Source: Morgan Stanley* Standard deviation divided by mean
Volatilit y of Expected Losses In the Models and in the Real World
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39Please see additional important discl osures at the end of this report.
Correlation Impact on Portfolio Loss Distribution
When the names in a portfolio are
correlated, the expected portfolio loss
distribution is less concentrated in any one
single loss bucket
A portfolio that consists of correlated
names also has a fatter right tail
Probability
0%
10%
20%
30%
40%
50%
60%
0-2%
2-4%
4-6%
6-8%
8-10%
10-12%
12-14%
14-16%
16-18%
18-20%
20-22%
Losses
Independent & Identical Independent Correlated
Source: Morgan Stanley
Correlation Creates Portfolio L ossDistributions w ith Fatter Tails
40Please see additional important discl osures at the end of this report.
Summary of Greeks
Change in tranche value due to the passage of timeTheta ()
Change in tranche value due to changes in default correlationRho ()
Tranche price sensitivity of a delta-neutral position to jump-to-default risk or changes inspread distribution of the underlying portfolio. It represents a form of convexity to movesin a single credit while all others remain constant (I = Idiosyncratic risk)
I-Gamma (i-)
Tranche price sensitivity of a delta-neutral position to parallel shifts in spreads ofunderlying names. It represents a form of convexity (M = Market)
M-Gamma (m-)
Tranche price sensitivity to changes in underlying portfolio spreads, measured as a ratioof tranche PV01 to index PV01 (PV10% is also used sometimes)
Delta ()
What does it measure?Greek
Source: Morgan Stanley
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41Please see additional important discl osures at the end of this report.
Delta or Sensitivity to Spread Changes
As spreads widen, a short protection position in
any of the tranches would experience a negative
mark-to-market
For small spread movements, the price impact can
be estimated using tranche delta (PV01 or
PV10%)
Tranches with higher deltas would move more
than tranches with lower deltas; tranches with
deltas less than 1x would move less than the index
(and vice versa)
Broadly speaking, junior tranches have higher
deltas than senior tranches due to higher default
risk, assuming both are quoted on a running
premium basis
For bigger moves in spreads, delta-basedcalculations are only approximations, as tranche
convexity becomes more meaningful
-30%
-20%
-10%
0%
10%
20%
30%
50% 75% 100% 125% 150% 175% 200%
Spread Change Factor
P&L(%)
0-3% 3-7% 7-10%
10-15% 15-30% 0-100%
Source: Morgan Stanley
Spread Sensitivity
42Please see additional important discl osures at the end of this report.
I-Gamma or Sensitivity to Spread Distribution Changes
-0.20%
-0.15%
-0.10%
-0.05%
0.00%
0.05%
0-3% 3-7% 7-10% 10-15% 15-30%
AIG+16bps
MMC+240bps
The effect of changes in the distribution of the underlying spreads, especially when the overall portfolio average
remains unchanged, is subtle and worth exploring.
Tight trading names moving somewhat wider generally impact senior tranches, while wide or even average credits
moving significantly wider impact junior mezzanine and first-loss tranches, depending on the size of the move.
For example, in 2004, a 16 bp move in a tight trading name (AIG) increased risk in 15-30% type tranches, while
widening of Marsh & McLennan from 30 to over 250 bp shifted the risk from 15-30% type tranches to 0-3% tranches.
Source: Morgan Stanley
Tranche Pricing Impact:Two Opposite Examples
Insurance Moves to the Right, ImpactingBoth Senior and Subordinate TranchesNumber of Credits
0
5
10
15
20
25
30
0-
10
10-
20
20-
30
30-
40
40-
50
50-
60
60-
70
70-
80
80-
90
90-
100
100-
110
110-
120
120-
130
130-
140
140-
150
150-
160
160-
170
170-
180
180-
190
190-
200
Spread
15-30%7-15%3-7%0-3%
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43Please see additional important discl osures at the end of this report.
Tranche Convexity or M-Gamma
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
50% 75% 100% 125% 150% 175% 200%
Spread Change Factor
P&L(%)
0-3% 3-7% 7-10%
10-15% 15-30%
-2%
-1%
0%
1%
2%
3%
4%
5%
50% 75% 100% 125% 150% 175% 200%
Spread Change Factor
P&L(%)
0-3% 3-7% 7-10%
10-15% 15-30%
Source: Morgan Stanley
The impact of w ide spr ead moves is measured by M-Gamma, that is PV100 or 100*PV01
Delta neutral positions on in-the-money tranches are positively convex, while such positions onout-of-the-money tranches are typically negatively convex (from the perspective of the protectionseller)
5 Yr IG Tranche Convexity(Delta Neutral)
10 Yr IG Tranche Convexity(Delta Neutral)
44Please see additional important discl osures at the end of this report.
Jump to Default Sensitivity Differs by Investor Type
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
0-3
%5
Yr
IG
3-7
%5
Yr
IG
7-1
0%
5Yr
IG
10-1
5%
5Yr
IG
15-3
0%
5Yr
IG
Index
5Yr
IG
0-3
%1
0Yr
IG
3-7
%1
0Yr
IG
7-1
0%
10Yr
IG
10-1
5%
10Yr
IG
15-3
0%
10Yr
IG
Index
10Yr
IG
0-1
0%
5Yr
HY
10-1
5%
5Yr
HY
15-2
5%
5Yr
HY
25-3
5%
5Yr
HY
35-1
00%
5Yr
HY
Index
5Yr
HY
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
0-3%
5YrIG
3-7%
5YrIG
7-10%
5YrIG
10-15%
5YrIG
15-30%
5YrIG
0-3%
10YrIG
3-7%
10YrIG
7-10%
10YrIG
10-15%
10YrIG
15-30%
10YrIG
0-10%
5YrHY
10-15%
5YrHY
15-25%
5YrHY
25-35%
5YrHY
35-100%
5YrHY
We divide the market into two broad camps
Community 1: Levered investors with long/short strategies and exposure to equity/junior
mezzanine type tranches
Community 2: Other institutional investors (banks, insurance, money managers) who are more
ratings-sensitive, higher up in the capital structure
Source: Morgan Stanley
Loss Due to 1 Default (% of Notional) Delta Neutral P/L Due to 1 Default (% of Notional)
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45Please see additional important discl osures at the end of this report.
The Unwind Risk Three Triggers
20062005
Avg Notches
for Downgrade
As a % of Rated
Universe*
Avg Notches
for Downgrade
As a % of
Rated Universe*
6.8%
7.7%
Downgrades
58
87
Upgrades
2.3%
8.2%
Upgrades
1.59
1.88
159
70
Upgrades
4.5%
6.6%
Upgrades
137
67
Downgrades Downgrades
S&P
Moody's
Downgrades
1.51826.3%
1.392385.3%
Synthetic CDO Rating Act ions
A significant move wider in spreads, which if combined with equity correlation moving lowercould force the hand of many. A modest move wider is actually supportive of todays market
Significant downgrade activity at the tranche level, particularly AAAs and AAs
Jump to defaults, 2001/2002 style. Sudden shifts are not priced in
Our base case is for the structured credit bid at the rated tranche level to continue, but warning
flags about the risks have been raised
*2005 numbers calculated as a percentage of the rated tranches outstanding as of 1/1/2005. 2006 numberscalculated as a percentage of the rated tranches outstanding as of 1/1/2005 for Moodys and 1/1/2006 for S&P.Source: Morgan Stanley, S&P, Moodys.
Ratings Activity
46Please see additional important discl osures at the end of this report.
Thinking About Zero Correlation
Low levels of implied correlation can be
interpreted as indicating an environment
in which defaults are driven more by
idiosyncratic events than by a
recessionary environment
The markets interpretation of the future
should be most evident in mezzanine
tranches
Based on this risk-neutral framework, 7-
10% in 7 years and 10-15% in 10 years
can go tighter
5 year 3-7% has traded near their zero
correlation level recently
Source: Morgan StanleyNote: 5-Year CDX 6 tranches.
bp
0
50
100
150
200
250
300
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Correlation
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
bp3-7% (LA) 7-10% (LA) 0-3% (RA)
0% Correlation Equals 0bp Spread Level
0% Correlation Above0bp Spread Level
What Happens When Correlation Goes to Zero?
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47Please see additional important discl osures at the end of this report.
DAL + NWAC = Correlation Without a Model
The 2000-2001 spike in default rates was
driven by both industry specific events and
unrelated bankruptcies across multiple
industries
The sizeable telecom buildup and bust was
a noteworthy industry specific event that
increased default rates
Other unrelated bankruptcies, driven by the
prevalence of fraud, resulted in defaults
across industries
The Delta and Northwest bankruptcy was a
combination of an industry specific event
and a broader cross-sector dynamic; the
ability to fund pensions and other future
labor costs
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
Cohort
Source: Morgan Stanley
Moody's 5 Year Cumulative Default Rate IG Universe
48Please see additional important discl osures at the end of this report.
Pensions and Labor Costs Link Industries
Issues such as pension and labor costs that
have plagued the airline industry may
spread to other sectors
Similar issues could prove to be a driver in
determining default correlation across
sectors
This list highlights companies where
significant potential exists for a high
realized default correlation
It must be noted that the extent to which
pension and healthcare issues are addressed
through legislation will not reduce the
correlation these companies will experience
their fates are tied regardless of
exogenous risks24%MiningALAlcan Inc29%Metal Fabricate/HardwareTKRTimken Co22%ChemicalsTRATerra Industries Inc22%Auto Parts & EquipmentTRWTRW Automotive Holdings Corp22%ChemicalsHPCHercules Inc25%Auto Parts & EquipmentDCNDana Corp27%ChemicalsPOLPolyOne Corp29%Forest Products & PaperBOWBowater Inc32%Auto Parts & EquipmentTENTenneco Automotive Inc33%Forest Products & PaperABYAbitibi-Consolidated Inc
33%Forest Products & PaperSSCCSmurfit-Stone Container Corp34%Auto ManufacturersNAVNavistar International Corp36%ComputersUISUnisys Corp40%Auto Parts & EquipmentARMArvinMeritor Inc43%Auto ManufacturersGMGeneral Motors Corp62%Oil & GasAENAustral Pacific Energy Ltd68%Auto ManufacturersFFord Motor Co73%Auto Parts & EquipmentVCVisteon Corp81%Auto Parts & EquipmentDRRADura Automotive Systems Inc
102%Auto Parts & EquipmentHAYZHayes Lemmerz Intl Inc112%Auto Parts & EquipmentGTGoodyear Tire & Rubber Co145%AirlinesAMRAMR Corp147%Iron/SteelAKSAK Steel Holding Corp215%AirlinesCALContinental Airlines Inc256%Auto Parts & EquipmentDPHDelphi Corp266%Auto Parts & EquipmentXIDEExide Technologies875%AirlinesNWACNorthwest Airlines Corp1
1235%AirlinesDALDelta Air Lines Inc1
Funding Gap/Mkt CapIndustry GroupTickerIssuer
Source: Morgan Stanley(1) Market Cap based on the average of the 6 months prior to the bankruptcy filing.
Not Only One Sector Unfunded PensionLiabilities Relative to Equity MarketCapitalization
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49Please see additional important discl osures at the end of this report.
Visualizing Real-World Correlation
Recent moves in implied correlation seemcounterintuitive
The contradiction can be understood bylooking at 2 worlds
World A likelihood of 100 defaults areequally related to one another
World B the default propensity of threecompanies are highly correlated to eachother but not to the rest
The average correlation fails to acknowledgethat many of the names have differentrelationships than this average indicator
Therefore, while one may see a lowerimplied correlation, it could be a scenario ofhigh correlation for a small subset ofcompanies
50%50%10%10%10%100
50%50%50%10%10%10%4
10%10%10%90%90%3
10%10%10%90%90%2
48%10%10%10%90%90%1
Aver age10054321Credit
WORLD B
50%50%50%50%50%100
50%50%50%50%50%5
50%50%50%50%50%4
50%50%50%50%50%3
50%50%50%50%50%2
50%50%50%50%50%50%1
Aver age10054321Credit
WORLD A
Source: Morgan Stanley
Correlation Details Matter
50Please see additional important discl osures at the end of this report.
ABX and TABX Whats in It?
ABX Based on 20 underlying subprime homeequity ABS transactions. Indices with ratingsAAA, AA, A, BBB, and BBB- are created toreference the difference tranches in each ofthese 20 transactions. New series of the indexare created every six months; so far threeseries have traded: ABX 06-1, 06-2 and 07-1
Recent volatility has been mostly confined tothe BBB and BBB- classes
Tranched ABX (TABX) launched on February14, 2007. Two sets of tranches will trade,referencing BBB and BBB-. Each of these, inturn, will reference the 40 securities resulting incombining ABX 06-2 and ABX 07-1
While tranche trading has become a highlyliquid and commoditized product in corporatecredit, TABX is a long way away from thisstatus
40%-100% Tranche
25%-40% Tranche
15%-25% Tranche
10%-15% Tranche
5%-10% Tranche
0%-5% Tranche
ABX.HE BBB- Indices
60% Amortization on Underlying Indices
10% Writedown on Underlying Indices
Illustrative Flow ABX.HE BBB- Indices
Source: Morgan Stanley
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51Please see additional important discl osures at the end of this report.
65
70
75
80
85
90
95
100
Jul-06 Sep-06 Oct-06 Dec-06 Feb-07
ABX HE Indices Have Fallen Sharply
ABX 06-1 ABX 06-2 ABX 07-1
Sell-off has been dramatic, but traded volumes remain li ght.
Different technicals relative to single-name ABS CDS market.
$ Price of ABX HE BBB- Indices
Source: Mark-it
52Please see additional important discl osures at the end of this report.
TABX Early Experience
Source: Morgan Stanley
Much of the trading activity has been in
the 40-100% tranches
Concepts of delta and implied
correlation fraught with complications
and significantly unlike corporate
investment grade index tranches
Implied losses from underlying spreads
suggest that with the possible
exception of the two senior tranches,
rest are deeply in-the-money
At current spread levels, re-tranching
of the 40-100% tranche ((tranche-lets)offers an interesting correlation
market opportunity
TABX (BBB-) Price History (Feb 14 Mar 1)
30
40
50
60
70
80
90
100
2/14/200
7
2/15/200
7
2/16/200
7
2/17/200
7
2/18/200
7
2/19/200
7
2/20
/200
7
2/21
/200
7
2/22
/200
7
2/23
/200
7
2/24
/200
7
2/25
/200
7
2/26
/200
7
2/27
/200
7
2/28
/200
7
3/1/20
07
40-100%
5-10%
15-25%
0-5%10-15%
25-40%
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53Please see additional important discl osures at the end of this report.
Disclaimer
Credit Products Rating Distribution Table(as of February 28, 2007)
Rating Count
o
Total Count
o
Total IBC
o a ng
Category
Overweight 121 38% 69 38% 57%
Equal-weight 134 42% 77 42% 57%
Underweight 64 20% 38 21% 59%
Total 319 184
Equal-weight (E) Over the next 6 months, the fixed income instruments total return is expected to be in line withthe average total return of the relevant benchmark, as described in this report, on a risk adjusted basis.
Underweight (U) Over the next 6 months, the fixed income instruments total return is expected to be below theaverage total return of the relevant benchmark, as described in this report, on a risk adjusted basis.
More volatile (V) The analyst anticipates that this fixed income instrument is likely to experience significant priceor spread volatility in the short term.
Coverage Universe Investment Banking Clients (IBC)
Coverage includes all companies that we currently rate. Investment Banking
Clients are companies from whom Morgan Stanley or an affiliate received
investment banking compensation in the last 12 months.
Analyst Ratings Definitions
Overweight (O)Over the next 6 months, the fixed income instruments total return is expected to exceed theaverage total return of the relevant benchmark, as described in this report, on a risk adjusted basis.
54Please see additional important discl osures at the end of this report.
DisclaimerImportant Disclosures on Subject Companies
The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and/or one or more of its affiliates (collectively, Morgan Stanley) and the researchanalyst(s) named on page one of this report.
Morgan Stanley policy prohibits research analysts from investingin securities/instruments in their MSCI sub industry. Analysts may nevertheless own such securities/instruments to theextent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition.
Morgan Stanley is involved in many businesses that may relate t o companies or instruments mentioned in this report. These businesses include market making, providing liquidity andspecialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley trades as principal in thesecurities/instruments (or related derivatives) that are the subject of this report. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report.
Other Important Disclosures
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55Please see additional important discl osures at the end of this report.
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