Original PDF Flash format CDO/CDS-Update-02/21/06  


CDO/CDS Update 02/21/06

Nomura Fixed Income Research
CDO/CDS Update 02/21/06
I. Commentary

Commercial real estate CDOs show no sign of slow down, as two deals priced last week and the
pipeline mushroomed with CRE deals. The newest trend seems to be the inclusion of CDO tranches
in the underlying portfolio. For example, one deal in the pipeline, CT CDO IV, is backed by a portfolio
of 37 CMBS, two B-notes, one mezzanine loan, and nine tranches of CRE CDOs. While CMBS
bonds make up over 60% of the deal's underlying portfolio, nine CDO tranches from five deals
represent 30%. On the synthetic side, CRE CDOs are expanding to non-triple-A CMBS. Abacus
2006-10, currently in the pipeline, references a static portfolio of 70 single-A CMBS. Synthetic CMBS
CDOs first appeared in the summer of 2005, but the earlier transactions used triple-A CMBS in
reference portfolios. The deal uses just two credit events, failure to pay principal and writedown.
U.S. CDS spreads tightened to the tightest level of the year, . The 5-year DJ CDX.NA.IG finished
the week 1.4 bps tighter at 44.0 bps, the tightest level since the beginning of the year. The high-
volatility (HVOL) sub-index also moved tighter by 3.6 bps to 90.8 bps, while the CDX.XO index saw
its spread move in by 7.5 bps to finish the week at 213.3 bps. The CDX.EM index opened somewhat
wider from the historical tight level reached in the prior week, but managed to finish tighter on the
week at 102.2 bps. The European indices finished flat to slightly tighter, while the iTraxx CJ Japan
index actually widened by 1.6 bps to 26.8 bps, the widest level year to date. The Japanese CDS
index spreads have been moving in sync with the rising yen Libor rates in the recent weeks.
In the single-name market, AMR Corp., parent of American Airlines, came under spotlight, as its CDS
spreads tightened dramatically in the recent weeks. AMR's 5-year CDS spread tightened by 81 bps
in one week, marking a 2-year low of 869 bps by Friday. The company reported a quarter loss of
$604 million, but the company's share price rose by 8%. Spreads in the auto sector also tightened
significantly last week, as the fear of a strike at Delphi subsided, at least for now. The 5-year CDS of
FMCC and GMAC tightened by 29 bps and 37 bps, respectively, to 476 bps and 404 bps.
The 3%-6% tranches of the7- and 10-year iTraxx Europe continued to widen, amid talk of
hedging activity related to a leveraged super senior tranche. In the 7-year sector, most tranches
moved tighter last week, but the 3%-6% tranche of the iTraxx widened by 3 bps to 203 bps. This
particular tranche has widened by 26 bps since the beginning of the year. Moreover, the same 3%-
6% tranche in the 10-year index widened another 20 bps to 598 bps last week. This tranche has
widened by 74 bps over the past two weeks and is now 92 bps wider year to date. Other tranches of
the 10-year iTraxx index also finished the week 2-9 bps wider, except for the 0%-3% tranche, which
tightened by 0.5%. In contrast, the 10-year tranches of the CDX.NA index tightened across the board.
Contacts:
Michiko Whetten
(212) 667-2338
mwhetten@us.nomura.com

Kyoko Teratani
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Nomura Fixed Income Research
S&P raised ratings on 26 European synthetic CDO tranches while downgrading nine tranches
and removing four tranches from creditwatch.1 Three of the downgrades were related to the revision
of S&P's CDO model from Evaluator 2.4.3 to Evaluator 3.0 in December 2006. Since the new model
was introduced, S&P has downgraded 37 tranches and upgraded 33 tranches. The rating agency
had been under attack from various market participants for its simplistic and less conservative
assumptions about correlation. However, S&P also revised its assumptions about default probability,
perhaps trying to lessen the impact on existing deals.
The main changes in the new model include; (1) higher inter-industry correlation, (2) lower intra-
industry correlation, (3) lower default probability for investment-grade ratings except for 'BBB-,' and
(4) higher default probability for ratings of 'BBB-' and below. S&P has set a transition period through
the first quarter of 2006, where, instead of using the new model exclusively, a tranche's credit rating
won't be altered as long as differences in analytical results of the old and new models fall within
certain "tolerance levels." S&P published a handbook for the new model last week.2
U.S. CDO issuance is likely to remain robust through the first half of 2006, according to
Moody's.3 The rating agency reported that issuance volume surged by 73% from $94 billion in 2004
to $162 billion in 2005. The number of new deals also increased from 227 to 363 over the same
period. By deal types, re-securitizations (i.e., ABS CDO), synthetics and CLOs made up nearly 90%
of new deals. While the current pipeline indicates that issuance is likely to remain brisk over the near
term, the activity is unlikely to keep up with the record pace, as default rates gradually increase from
cyclical low levels. A slow down in synthetic activity became evident in the fourth quarter of 2005,
when the number of rated deals dropped by half from the previous quarter.
Moody's also noted that credit performance of CDOs improved last year with the downgrade-to-
upgrade ratio of 2:1, compared to the ratio of 8:1 in 2004. Interestingly, the downgrade-to-upgrade
ratio by Moody's is higher than that of S&P, which has reported a downgrade-to-upgrade ratio of 1.2:1
for the CDO sector in 2005.4











1 Sarnstedt, J., et al., Various Rating Actions Taken on European Synthetic CDO Tranches - February 2006, S&P
press release (15 February 2006).
2 The hand book is available from S&P's web site; www.standardandpoors.com.
3 US CDO issuance still on record pace; pipeline suggests 2006 should meet or exceed record-breaking 2005
issuance, Moody's press release (7 February 2006).
4 Erturk, E., et al., Rating Transitions 2005: Credit Quality of Global CDOs Improved, Although Affected by High-
Profile Credit Events, S&P research (24 January 2006).
(2)

Nomura Fixed Income Research
II. Recent Pricing & Pipeline:

Issue Date
Size
Collateral
Assets Lead
Class
Rating
WAL Spread
(mm)
Manager
FTN
Preferred
02/16 $784.75
Financial
TruPS FTN/KBW



TSL -21
Capital
Mkts

413.50



A-1
Aaa/AAA/AAA
+35/3ML

105.30



A-2
Aaa/AAA/AAA
+40/3ML
46.00



B-1
Aa2/-/AA

+65/3ML
35.80



B-2
Aa2/-/AA

+65/Swap
48.50



C-1
A3/-/A-

+115/3ML
28.35



C-2
A3/-/A-

+115/Swap
56.30



D -/-/BBB

+210/3ML
51.0



IN

LNR IV
2/16
$1,600.00
LNR
CRE GS/DBS



Partners

474.385



A
Aaa/AAA/AAA 7.99
+35/1ML

204.174



B-FL
Aa2/AA/AA
9.71
+55/1ML
10.00



B-FX
Aa2/AA/AA
9.71
+55/Swap

73.154



C-FL
A2/A/A
9.75
+85/1ML
54.95



C-FX
A2/A/A
9.75
+85/Swap
10.00



D-FL
A3/A-/A-
9.85
+100/1ML

54.052



D-FX
A3/A-/A-
9.85
+100/Swap

72.058



E
Baa1/BBB+/BBB+ 9.92 +265/1ML

56.046



F
Baa2/BBB+/BBB+ 9.98 +300/1ML

78.063



G
Baa3/BBB-/BBB- 10.40 +350/1ML

514.419



Equity

ZAIS-VIII* 2/16 $450.00
Zais
Mezz
DBS



Group
ABS
258.9



A-1
Aaa/AAA/-
6.6

90.0



A-2
Aaa/AAA/- 7.8
+50/3ML
33.8



B Aa2/AA/-
7.0
+60/3ML
21.0



C A2/A/-
7.0
+165/3ML
22.5



D
Baa2/BBB/-
7.0
+325/3ML
23.8



Equity

N-Star REL
2/15 $450.00
NS
CRE WS


CDO VI
Advisors

244.800



A-1
Aaa/AAA/AAA 6.1
+33/1ML

27.225



A-2
Aaa/AAA/AAA 7
+38/1ML

21.825



B
Aa2/AA/AA
7
+44/1ML

12.825



C A1/A+/A+
7
+74/1ML

13.950



D A3/A-/A-
7
+94/1ML

10.125



E
Baa1/BBB+/BBB+
7
+165/1ML
7.650



F
Baa2/BBB/BBB
7
+185/1ML
9.900



G
Baa3/BBB-/BBB 7 +300/1ML
Stone
Stone
2/15 $750.00
Tower
Loans CS



Tower- 4
Debt
Advisors

567.00



A-1
Aaa/AAA/- 8.0
+27/3ML
42.50



A-2
Aa2/AA/-
9.1
+47/3ML
33.50



B A2/A/-
9.1
+80/3ML
29.00



C-1
Baa2/BBB/- 9.1
+187/3ML
2.00



C-2
Baa2/BBB/-
9.1
Cpn6.947%
Yld 7.001%
16.00



D

+475/3ML
60.00



Sub



Notes
Belhurst
2/15 $500.0
Invesco
Loans
UBS


CLO
310.0



A1
Aaa/AAA/-

+26/3ML
30.00



A2
Aaa/AAA/-

+26/3ML
45.00



A3
Aaa/AAA/-

+26/3ML
15.00



B Aa2/AA/-

+40/3ML
35.00



C A2/A/-

+70/3ML
12.50



D
Baa2/BBB/-

+170/3ML
12.50



E Ba2/BB/-

+460/3ML
40.00



IN


(3)
Nomura Fixed Income Research
Denali
DC
Capital
02/15 $500.00
Funding
Loans BS



CLO-VI
Partners

277.00



A1L
Aaa/AAA/--
7.5


100.00



A1LR
Aaa/AAA/--


27.00



A2L
Aa2/AA/--
8.0
+45/3ML
24.00



A3L
A2/A/--
8.0
+69/3ML
19.00



B1L
Baa2/BBB/--
8.0
+170/3ML
24.00



B2L
Ba/BB/--
8.0
+425/3ML
29.00



P/S

Ares VR
2/15 $625.00
Ares CLO
Loans
GS




CLO ltd
Mgmt


468.7



A
Aaa/AAA/--
7.5
-
22.1



B Aa2/AA/--
10.1
+42/3ML
23.4



C A2/A/--
10.5
+75/3ML
56.2



D
Baa2/BBB/--
11.3
+190/3ML
54.6



Sub



New Pipeline
Size (mm)
Collateral Man.
Assets
Lead
CBRE Reality Finance CDO 20006-1
$600.00
CBRE Reality Finance Mgmt
CRE
DBS
Bernoulli High Grade CDO I
$1,500.00
Babcock and Brown
HG ABS
ML
Vertical 2006-1
$300.00
Vertical Capital Investment Advisors
CRE
BS
Sorin Real Estate CDO III
$1,000.00
Sorin Capital Mgmt
CRE
BAS
Legg Mason RE CDO I
$500.00
Legg Mason
CRE
CITG
CT CDO IV
$490.00
Capital Trust
CRE
GS
Bernard CDO I
$285.00
D.B Zwirn & Co
ABS
LB
Duke Funding X
$1,000.00
Duke Funding Mgmt
ABS
UBS
* denotes synthetic. Source: MCM, IFR, Bloomberg
(4)

Nomura Fixed Income Research
III. CDS
Spreads
Moody's
S&P's
Week
Index Constituent
Feb. 17
Week Ago
5Y CDS Index
Feb. 17
Change
Rating
Rating
Ago
Fannie Mae
9
9
Aaa
AAA
CDX.NA.IG 5
44.00
45.35
-1.35
Boeing
16
16 A3 /*+
A
CDX.NA.IG 5 HVOL
90.82
94.46
-3.64
IBM
15
16
A1
A+
CDX.NA.IG XOVER
213.25
220.78
-7.53
Deere & Co
18
18
A3
A-
CDX.NA.HY 5
323.58
332.50
-8.92
GE Capital
17
18
Aaa
AAA
CDX.EM 4
102.24
104.13
-1.89
AIG
17
17
Aa2
AA
iTraxx Europe 4
36.44
36.51
-0.07
Dow Chemical
22
22
A3
A-
iTraxx Europe HVOL
74.91
76.20
-1.29
Alcoa
18
19
A2
A-
iTraxx Europe X-over
266.11
270.03
-3.92
CIT Group
24
25
A2
A
iTraxx CJ Japan 4
26.76
25.16
+1.60
Duke Energy
32
34
Baa1
BBB
iTraxx Asia ex-Japan
38.19
38.45
-0.26
McDonalds
19
20
A2
A
iTraxx Australia
28.58
28.84
-0.26
Walt Disney
26
28 Baa1 /*+
A-
iTraxx SDI-75
42.20
42.35
-0.15
Viacom
50
53
Baa3
BBB
CDX Widest
Feb. 17
Time Warner
48
59 Baa1 /*- BBB+ /*-
Amern Axle & Mfg Inc
556
Computer Associates
67
66
Ba1
BBB-
Knight Ridder Inc
227
Altria Group
55
58
Baa2
BBB
Albertsons Inc
190
Albertsons
190
197 Baa3 /*- BBB- /*-
SUPERVALU INC
165
Ford Motor Credit
449
484
Ba3
BB-
Cendant Corp
116
GMAC
384
422
Ba1 /*
BB /*
CDX Tightest
Feb. 17
Carrefour
19
19
A1
A+
Fed Home Ln Mtg Corp
8
AXA
18
19
A2
A
Fed Natl Mtg Assn
9
AKZO Nobel N V
44
45
A3
A-
Wal Mart Stores Inc
10
Suez
23
24
A2
A-
Target Corp
11
GUS PLC
51
51
Baa1
BBB+
Wells Fargo & Co
12
Cadbury Schweppes PLC
34
29
Baa2
BBB
iTraxx Widest
Feb. 17
Renault
36
38
Baa1
BBB+
TDC A/S
297
Brit Telecom PLC
48
51
Baa1
A-
VNU NV
214
Lafarge
49
50 Baa2 /*-
BBB /*-
Hilton Gp PLC
164
Deutsche Telekom AG
49
51
A3
A-
Casino Guichard Perrac
135
METRO AG
41
41
Baa2
BBB
Glencore Intl AG
118
France Telecom
51
52
A3
A-
iTraxx Tightest
Feb. 17
Telecom Italia SpA
57
58
Baa2
BBB+
BP P.L.C.
7
Volkswagen AG
36
38
A3
A-
ABN AMRO Bk N V
8
DaimlerChrysler AG
63
65
A3
BBB
Gov & Co Bk Scotland
8
Alcatel
18
19
Ba1
BB
Royal Bk Scotland plc
8
Koninklijke Ahold N V
18
19
Ba1
BB
Barclays Bk plc
8
Single-name CDS spreads are on a "XR" basis (without restructuring).
Source: Markit and Bloomberg

ABX.HE Index (as of February 17, 2005)
Weekly Coupon
Index Price
change
(bps)
ABX.HE.AAA.06-1
100.29
+ 0.04
18
ABX.HE.AA.06-1
100.24
+ 0.07
32
ABX.HE.A.06-1
100.20
+ 0.08
54
ABX.HE.BBB.06-1
100.33
+ 0.02
154
ABX.HE.BBB-.06-1
100.25
+ 0.17
267
Source: Markit

(5)
Nomura Fixed Income Research
IV. CDS Index Tranche Indicative Spreads & Base Correlation
iTraxx Europe Series 4 (5 years)
17-Feb
10-Feb
Change
Overall index spread
36.25
36.5 bps
- .3 bps
Spread Correlation
Spread
Correlation
Spread
Correlation
0%-3%
27%
10.0%
28%
9.6%
- .5%
+ .4%
3%-6%
78 bps
21.0%
80 bps
20.2%
- 2.0 bps
+ .9%
6%-9%
25 bps
28.6%
26 bps
27.4%
- .5 bps
+ 1.3%
9%-12%
11 bps
35.1%
12 bps
33.4%
- 1.0 bps
+ 1.8%
12%-22%
5 bps
51.9%
5 bps
49.3%
+ 0.0 bps
+ 2.6%
CDX.NA.IG Series 5 (5 years)
17-Feb
10-Feb
Change
Overall index spread
44.0 bps
45.25
- 1.3 bps
Spread
Correlation
Spread Correlation
Spread
Correlation
0%-3%
36%
9.0%
36%
8.8%
- .3%
+ .2%
3%-7%
109 bps
22.8%
110 bps
22.4%
- 1.0 bps
+ .4%
7%-10%
26 bps
30.5%
25 bps
30.2%
+ 1.0 bps
+ .3%
10%-15%
12 bps
40.7%
13 bps
40.2%
- .3 bps
+ .5%
15%-30%
5 bps
62.9%
5 bps
62.2%
+ 0.0 bps
+ .7%
iTraxx Europe Series 4 (7 years)
17-Feb
10-Feb
Change
Overall index spread
47.75
47.75
+ 0.0 bps
Spread Correlation
Spread
Correlation
Spread
Correlation
0%-3%
48%
6.2%
49%
5.9%
- .6%
+ .3%
3%-6%
203 bps
18.4%
200 bps
18.2%
+ 2.5 bps
+ .2%
6%-9%
49 bps
28.3%
50 bps
27.9%
- 1.0 bps
+ .4%
9%-12%
28 bps
36.0%
27 bps
35.6%
+ 1.0 bps
+ .3%
12%-22%
12 bps
56.2%
12 bps
55.7%
+ 0.0 bps
+ .5%
CDX.NA.IG Series 5 (7 years)
17-Feb
10-Feb
Change
Overall index spread
53.8 bps
54.75
- 1.0 bps
Spread
Correlation
Spread Correlation
Spread
Correlation
0%-3%
53%
4.7%
54%
4.3%
- .6%
+ .4%
3%-7%
243 bps
17.7%
245 bps
17.0%
- 2.0 bps
+ .7%
7%-10%
43 bps
26.5%
44 bps
25.5%
- .3 bps
+ .9%
10%-15%
23 bps
37.6%
24 bps
36.2%
- .5 bps
+ 1.3%
15%-30%
7 bps
63.7%
8 bps
61.7%
- .1 bps
+ 2.0%
iTraxx Europe Series 4 (10 years)
17-Feb
10-Feb
Change
Overall index spread
59.5 bps
59.75
- .3 bps
Spread Correlation
Spread
Correlation
Spread
Correlation
0%-3%
59%
6.5%
59%
5.9%
- .5%
+ .6%
3%-6%
598 bps
11.0%
578 bps
11.0%
+ 20.0 bps
+ .1%
6%-9%
129 bps
20.7%
120 bps
20.8%
+ 8.5 bps
- .1%
9%-12%
56 bps
29.0%
52 bps
29.2%
+ 4.0 bps
- .2%
12%-22%
24 bps
50.6%
22 bps
51.2%
+ 2.0 bps
- .7%
CDX.NA.IG Series 5 (10 years)
17-Feb
10-Feb
Change
Overall index spread
66.0 bps
67.0 bps
- 1.0 bps
Spread
Correlation
Spread Correlation
Spread
Correlation
0%-3%
61%
4.7%
61%
4.6%
- .1%
+ .1%
3%-7%
624 bps
10.1%
632 bps
9.6%
- 8.0 bps
+ .4%
7%-10%
117 bps
18.6%
120 bps
17.8%
- 3.0 bps
+ .7%
10%-15%
58 bps
28.9%
60 bps
27.6%
- 2.0 bps
+ 1.3%
15%-30%
15 bps
56.3%
15 bps
54.0%
- .3 bps
+ 2.3%

Source: Nomura
(6)

Nomura Fixed Income Research
I Michiko Whetten, a research analyst employed by Nomura Securities International, Inc., hereby certify that all of the
views expressed in this research report accurately reflect my personal views about any and all of the subject securities or
issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or
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© Copyright 2006 Nomura Securities International, Inc.
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44 207 521 2000
David P. Jacob
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Translator
Kyoko Teratani

Translator