We discuss WW. Norton expanding and renewing space at 500 Fifth Avenue.

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1 Securitized Products Desk Strategy CMBS Market Watch March 23, 217 Market activity and relative value CMBS spreads in secondary trading were unchanged to marginally wider over the past week and the market was softer as broader markets wavered and nearterm supply increased. Broadly speaking, the supply story has continued to benefit the CMBS market as the legacy universe continues to pay down, at rates above consensus expectations, while new issuance has remained relatively light. While volumes are still off from last year, there has been an increase in nearterm supply, both in new issue and secondary. With an increase in new issue and secondary supply, dealer balance sheets likely increasing and bond yields declining, we turn less constructive over the near term on triple-a spreads. Over the medium term, however, we expect the new issue pipeline of conduit deals may slow for a temporary pause and the supply-demand dynamic will likely once again be supportive for triple-a securities. While CMBS triple-bs have outperformed the high yield corporate sector since the beginning of this month, better quality triple-bs still appear to offer relative value. Retail headlines, both positive and negative, will continue to weigh on the overall sector and are likely to drive a large portion of CMBX index flows. CMBS loans in the news We discuss WW. Norton expanding and renewing space at 5 Fifth Avenue. Closing Sears & Kmart stores and its impact on CMBS With many investors concerned over additional closures from Sears, along with other retailers, we attempted to track, in this analysis, how CMBS loans with Sears exposure have performed since a closure was announced. Sector Strategists Roger Lehman roger.lehman@credit-suisse.com Benjamin Rozyn benjamin.rozyn@credit-suisse.com CMBS and CMBX spreads and prices CMBS swap 1-wk Trailing 12-month spread/price 3/21/17 chg Min Max Avg Legacy CMBS AAA 1yr AM AJ yr AAA yr AAA AAA Junior AA A BBB CMBX.8 AAA AS AA A BBB BB Agency CMBS GNR 1yr FNA 1yr FREMF 1yr SBA 54 1yr Source: Credit Suisse, Markit DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND STRATEGIST CERTIFICATIONS. This document is a product of the Credit Suisse ( CS ) Fixed Income Sales and Trading Department. It is not a product of the Firm s Research Department. This material is intended only for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors pursuant to FINRA Rule This material is not independent of the Firm s proprietary interests, which may conflict with your interests. The Firm trades securities discussed in this report for its own account and on a discretionary basis on behalf of certain clients. Such trading may be contrary to the recommendations provided in this material. As part of the Trading Desk, the author may have consulted with the Firm s traders and other personnel while preparing this material, who may have already traded based on the views expressed in this material, or have existing positions in the securities discussed herein.

2 Mar-5 Dec-5 Sep-6 Jun-7 Mar-8 Dec-8 Sep-9 Jun-1 Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 JP5 BBB- N/A BBB/BBB+ Market activity and relative value CMBS spreads in secondary trading were unchanged to marginally wider over the past week and the market was softer as broader markets wavered and near-term supply increased. The softness was evident in the new issue market as the last cash flow AAA spread on the WFCM 217-RB1 conduit deal priced on Wednesday 5 bp wider than where it was initially talked (Figure 1). On the other hand, the BBB- bond launched 1 bp tighter than its guidance levels. Figure 1: Recent conduit pricing and guidance levels bp JPMCC 17-JP5 (px 3/7) GSMS 17-GS5 (px 3/7) JPMDB 17-C5 (px 3/17) WFCM 17-RB1 guidance WFCM 17-RB1 launch (px 3/22) LCF AAA AM/AS AA A BBB- Source: Credit Suisse, Commercial Mortgage Alert, the BLOOMBERG PROFESSIONAL TM service Broadly speaking, the supply story has continued to benefit the CMBS market as the legacy universe continues to pay down, at rates above consensus expectations, while new issuance has remained relatively light. To this point, the conduit universe has dropped by over $23 billion, in the first quarter of this year, as the legacy portion continues to rapidly decline (Figure 2) and new issue has underwhelmed. While volumes are still off from last year, there has been an increase in near-term supply, both in new issue and secondary. On the new issue side, three deals totaling $2.3 billion priced last week, two conduit deals totaling $1.4 billion were marketing at the beginning of this week while another conduit deal and a CRE CLO transaction are pre-marketing. Additionally, in the secondary market, we have seen an increase in the number of bid lists, for bonds both at the top and the bottom of the capital stack. Wednesday s bid list volume alone approached nearly $5 million, for the first time in a while. We believe some of the uptick in the number of lists may be attributed to month-end and quarter-end selling as well as overall spread levels. Figure 2: The outstanding conduit universe has been declining $bn Source: Credit Suisse, Trepp Legacy Post legacy CMBS Market Watch March 23, 217 2

3 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 From a relative value perspective, triple-a spreads over the past week have performed in-line with investment grade corporates. We compare super senior AAA benchmark spreads to our investment grade corporate index in Figure 3. Figure 3: The differential between triple-a CMBS and IG corporates still remains slightly below its longerterm average bp Diff (right-axis) LUCI Index Single A 7-1Yr CMBS LCF Source: Credit Suisse On the month, however, triple-a spreads have outperformed. We believe some of this is due to the supply differential as investment grade corporate issuance has been running higher this year and dealer balance sheets are near their highest levels. While this has been the opposite this year for CMBS, there has been a near-term pick-up in issuance with customers being net sellers in secondary trading over the past week, based on TRACE data. In addition to this, between the FOMC decision last week and the broader market focused on the health care vote and the reflation trade, US swap yields have fallen by more than 2 bp since the beginning of last week (Figure 4). As a result, triple-a CMBS bond yields have also declined to their lowest level this month (Figure 5). Figure 4:1yr US swaps yields % Figure 5: Triple-A CMBS yields % Source: Credit Suisse, the BLOOMBERG PROFESSIONAL TM service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL TM service CMBS Market Watch March 23, 217 3

4 With an increase in new issue and secondary supply, dealer balance sheets likely increasing and bond yields declining, we turn less constructive over the near term on triple-a spreads. Over the medium term, however, we expect the new issue pipeline of conduit deals may slow for a temporary pause and the supply-demand dynamic will likely once again be supportive for these securities. While CMBS triple-bs have outperformed the high yield corporate sector since the beginning of this month, better quality triple-bs still appear to offer relative value. Additionally, there continues to be strong demand from investors for these types of securities, as was evidenced by the tighter BBB- spreads on the recently issued conduit deal. Retail headlines, both positive and negative, will continue to weigh on the overall sector and are likely to drive a large portion of CMBX index flows. To this point, JC Penney released last Friday its closure list of 138 stores. The overall exposure to CMBS was relatively minimal and, of the post legacy loans, we found only one that has CMBX exposure. Overall we viewed this closure announcement as largely a non-event. On the other hand, concerns over Sears increased this week as their 216 Annual Report stated, as part of regulatory standards, that the company s historical operating results indicate substantial doubt exists related to the Company s ability to continue as a going concern. CMBS loans in the news W.W. Norton expanding and renewing space at 5 Fifth Avenue CSAIL 215-C1 and JPMBB 214-C26 (CMBX.8) W.W. Norton and company is taking more space at 5 Fifth Avenue, according to the Commercial Observer. The article states it will add an additional 17k square feet to bring its total to 95k in the 712k square foot building. The building backs a $2 million loan that is split, pari passu, equally between two deals. One $1 million slice is part of JPMBB 214-C26 (7% of the deal). The second, equal size slice makes up 8.3% of CSAIL 215-C1. The lease, which was scheduled to expire in July, was also extended but the length of the renewal was not disclosed. Closing Sears & Kmart stores and its impact on CMBS We have been closely monitoring the impact of Sears and Kmart store closings on the CMBS market since 211, when Sears Holdings Corp (SHLD) announced its plans to close a number of its locations. We have, over time, tried to track the sector s exposure, follow the impact on CMBS where stores have been closed and analyze lease expirations to find loans backed by properties with the highest risk of being closed. For example, we had reported in January on Sears initiating a round of closures for 15 Sears and Kmart stores. Our list of CMBS exposure to the closings announcement can be found here. We also discussed last week the closure of two Kmart stores, one of which has CMBS exposure. With many investors concerned over additional closures from Sears, along with other retailers, we attempted to track, in this analysis, how CMBS loans with Sears exposure have performed since a closure was announced. Our analysis focuses on loans that were outstanding when the announcement was made and includes properties where Sears or Kmart was either part of the collateral or has non-collateral exposure. Additionally, we attempted to exclude from our analysis any of the Sears Hometown and Outlet Stores, a company that was spun off from Sears Holdings in 212. In total, our analysis includes 115 stores, 76 of which collateralize loans that are still outstanding while the remaining 39 had backed loans that were either paid off or liquidated. For loans that are still outstanding, we compare the change in delinquency status at the closure announcement date to today. For loans that are no longer outstanding, we break out whether or not the loan was able to successfully pay off or if it incurred a loss. CMBS Market Watch March 23, 217 4

5 Based on our results, some of the findings were not surprising to us and have been themes we have consistently highlighted. For loans that were already delinquent or in special servicing at the time of the closure announcement, nearly all loans have either been liquidated or remain delinquent. We believe this also highlights that there were likely already issues at these properties, meaning the store closure should likely not have come as a surprise. For those loans that were performing when the closure was announced, only a handful of loans shifted status and are now currently delinquent or have been liquidated. As discussed in our 217 Outlook, the overall decline in the demand for retail space should have a disproportionate effect on the lower quality, lower performing shopping centers. On the other hand, we believe higher quality malls are better positioned and can even benefit from a transition from a weak anchor. We note, however, that our results are based on historical performance and, given the recent and ongoing shifts in the retail landscape, the same outcomes may not hold true today. As we mentioned in our 217 Outlook, we believe the retail sector will remain under considerable pressure, for the foreseeable future, due to changes in economic, demographic, technological and behavioral trends. Additionally, we note that it is difficult to make broad-brush generalizations regarding potential outcomes from Sears closures, or retail in general, and that each asset s resolution is unique. Nevertheless, we believe this analysis provides a starting point for thinking about Sears store closures and provides a template for further analysis as more potential closures come through. Outcomes for loans no longer outstanding Of the 115 stores in our analysis, 39 backed loans that are no longer outstanding. In Figure 6, we break out the results by the loan status at the time the closures were announced (in the columns) and the ultimate outcomes (in the rows). The outcomes are broken out into if the loan has been paid off successfully or defeased, if the loan had been liquidated with a loss that was less than 3% of the original balance, which we consider a low loss liquidation, or if the loan had been liquidated with a loss that was greater than or equal to 3% of the original balance. Additionally, we also split out whether or not the closure announcement was done longer than six months ago or if it was within the last six months. We provide this breakout as the more recent announcements may have not yet had an effect on the loan. Figure 6: Outcomes for loans no longer outstanding where a Sears/Kmart was reported as closed Loan status at closure announcement Announced > 6 mos ago Announced <= 6 mos ago Outcome Current Dlq / PSS Current Total Paid off / defeased Liquidated (< 3% severity) 1 1 Liquidated (>= 3% severity) Total Source; Credit Suisse, Trepp, Sears Holdings Not surprisingly, for closures that had been announced more than six months ago, five of the six loans that were already delinquent had been liquidated with a notable amount of loss. We believe this highlights that there were likely already issues at these properties, meaning the closure should likely not have come as a surprise. CMBS Market Watch March 23, 217 5

6 For the 31 properties that were current at the time of the closure announcement, only three loans were liquidated with meaningful losses while one was liquidated at a low loss. Across the eight loans that were liquidated with meaningful losses, severities ranged from as high as 95% to as low as 48%. In Figure 7, we show the severities for the eight liquidations as well as the number of months from being transferred to special servicing to being liquidated and from the closure announcement to being liquidated. Not surprisingly, the loans that spent more time in special servicing tended to have greater severities. Interestingly, these were also the loans where the Sears / Kmart closure announcement had come months after the loan had been transferred to the special. Those that had a closure announced before being transferred to the special had lower severities. Figure 7: Severities and timing for loans liquidated with meaningful losses Sev (% of orig) # of months from transfer to special to liq'd (right-axis) # of months from closure announced to liq'd (right-axis) Severity 1% 8% 6% 4% 2% % # of months Performance of outstanding loans Of the 115 stores in our analysis, 76 back loans that are still outstanding. In Figure 8, we break out the results by the loan status at the time the closures were announced (in the columns) and the current status (in the rows). The current status is broken out into if the loan is current, if the loan is current but had been modified since the closure announcement or if the loan is either delinquent or in special servicing. Again, we also split out whether or not the closure announcement was done longer than six months ago or if it was within the last six months. We provide this breakout as the more recent announcements may have not yet had an effect on the loan. Not surprisingly, there was no change in status for the more recent announcements. Figure 8: Current status for outstanding loans where a Sears/Kmart was reported as closed Announced > 6 mos ago Loan status at closure announcement Announced <= 6 mos ago Current status Current Dlq / PSS Current Dlq / PSS Total Current Curr / Modified since announcement 1 1 Dlq / PSS Total Source; Credit Suisse, Trepp, Sears Holdings Source: Credit Suisse, Trepp, Sears Holdings Of the 47 properties that had a closure announced more than six months ago, seven of these properties backed loans that were already delinquent or in special servicing at that time. Of these seven, only one became performing. We note that the loan that became performing (Eastdale Mall in WBCMT 24-C12) was current but in special servicing at the time the closure announcement was made. The loan has been transferred back to the master and Sears was replaced with an At Home, according to the servicer s commentary. For the 4 properties that were current at the time when a closure announcement was made more than six months ago, 3 are currently performing, while only one has since been modified and another nine are either delinquent or in special servicing. While a large percentage of these loans are still current, it is still possible that performance could decline over time, resulting in a change in status. CMBS Market Watch March 23, 217 6

7 Technical update Figure 9: US CMBS pipeline March 217 Deal type Rate type Size ($mn) LNSTR (Deal is in the market) Other Fixed 759 Citigroup, Principal, others Multiple Borrower Fixed 1,25 Wells Fargo, BofA, Morgan Stanley Multiple Borrower Fixed 9 Announced Total 2,684 Source: Credit Suisse, Commercial Mortgage Alert, Commercial Real Estate Direct Figure 1: Freddie Mac K-Deal Pipeline April 217 Deal series/type Loan term Rate type Issuance week of Size ($mn) K-F29 7yr floating-rate conventional 7-year Floating April 3 1,5 K-J13 Fixed-rate supplemental Various Fixed April 3 3 K-725 7yr fixed-rate conventional 7-year Fixed April 1 1,25 K-153 Fixed-rate conventional Various Fixed April May 217 K-64 1yr fixed-rate conventional 1-year Fixed May 1 1,5 K-F3 1yr floating-rate conventional 1-year Floating May 8 1,3 K-S8 1yr floating-rate seniors 1-year Floating May 15 5 K-TBD 1yr fixed-rate conventional 1-year Fixed May 15 4 Source: Freddie Mac, Credit Suisse Figure 11: 217 CMBS issuance (in $ millions) Month Multi- Borrower Floater Single Borrower Other 217 US Total 217 Non-US Total 217 Global Total US Agency CMBS* US Resecuritizations January 1, ,692 1,692 6,61 February 2,468 1,325 3,793 3,793 6,768 March 3, , ,215 6,215 6,45 Total 7, , ,7 11,7 18,875 * Multiple-pool Agency CMBS transactions only (i.e., deal tickers with GNR, FREMF, FNA, GEMS, MFMEG, SBAP and SBIC). Standalone DUS MBS and GN MBS pools are not included ** Floater category includes CRE CLOs. Source: Credit Suisse, Commercial Mortgage Alert CMBS Market Watch March 23, 217 7

8 DISCLOSURE APPENDIX Certification The author(s) of this material each certify, with respect to the securities or issuers that such author analyzed, that (1) the views expressed in this material accurately reflect his or her personal views about all of the subject securities or issuers, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the author in this material. Other Important Disclosures These materials have been prepared by a Sector Strategist. Sector Strategists are employees of CS's Fixed Income Sales and Trading Department and are supervised by Fixed Income Sales and Trading managers. Their primary responsibility is to support the trading desk. To that end, Fixed Income Sector Strategists prepare trade commentary, trade ideas, and other materials ("materials") in support of CS's trading desks. The Fixed Income Trading Desk trades or may trade as principal in the securities (or related financial instruments) that are the subject of these materials. As part of the Sales and Trading Department, the author of this material may have consulted with the Firm s traders and other personnel while preparing this material. Fixed Income Trading Desks may have accumulated, be in the process of accumulating, or accumulate long or short positions in the subject security or related securities on the basis of this material or other Sector Strategists' materials. Trading desks may have, or take, positions inconsistent with materials provided by Sector Strategists. Sector Strategists are not part of CS's Research Departments, and the views of CS's Trading Desks, including Sector Strategists, may differ materially from the views of the Research Departments and other divisions at CS. CS has a number of policies in place reasonably designed to promote the independence of CS's Research Departments from CS's Fixed Income Trading Desks, including policies relating to trading securities prior to distribution of research reports. These policies do not apply to the materials provided by Sector Strategists. The information in these materials has been obtained or derived from publicly available sources believed to be reliable, but CS makes no representations as to its accuracy or completeness. Sector Strategists may receive or develop additional or different information subsequent to your receipt of these materials. The materials provided by Sector Strategists are subject to change, and subsequent views may be inconsistent with information previously provided to you. CS does not undertake a duty to update these materials or to notify you when or whether the Sector Strategists' views have changed. These materials and other written and oral communications from Sector Strategists are provided for informational purposes only. They should not be considered sufficient upon which to base an investment decision. Solely for purposes of the CFTC s rules regarding derivatives research and to the extent this material discusses derivatives, this material is a solicitation for entering into a derivatives transaction and therefore should not be considered to be a derivatives research report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. Credit Suisse takes no responsibility for the content of any third-party site Links to third-party sites are provided solely for your convenience and information; accessing such sites is at your own risk. Copyright 217 CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved. CMBS Market Watch March 23, 217 8