CDS Spreads as Default Risk Indicators - Feb 2011

CDS Spreads as Default Risk Indicators

Robert J. Grossman, Group Managing

Director

Martin Hansen, Senior Director

February 2011

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www.fitchratings.com

Why Study CDS Spreads?

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Monoline REIT Home Builder

Source: Fitch Ratings, Fitch Solutions.

Property-Sensitive Sectors — CDS Spreads

(bps)

• Pronounced volatility in CDS spreads during the crisis

• Spreads are one of the analytical tools used by Fitch’s credit analysts (e.g., identifying outliers)

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Agenda

• CDS Spreads as Default Risk Indicators

• Overview: CDS vs. Bonds

• Methodology

• US Experience During the Crisis

• Europe: Banks and Insurers

• Risk Management Implications

• Margining: A Closer Look

• Margining Practices

• CDS Leverage and Return Dynamics

• Systemic Implications

• Appendix: Select Research on Other Topics

• US Money Fund Exposure to European Banks

• ‘Burden-sharing’

• Samples Used in CDS Analysis

CDS Spreads as Default Risk Indicators

Overview: CDS vs. Bonds

Methodology

US Experience During the Crisis

Europe: Banks and Insurers

Risk Management Implications

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CDS Embed both Long and Short Positions

Credit Default Swaps — Overview

Protection Seller(“Long” Credit Risk)

Protection Buyer(“Short” Credit Risk)

CDS Premiums (Cost of Insuring

the Reference Entity)

Insurance Payout (Upon a Credit

Event of the Reference Entity)

● CDS are economically akin to insurance and provide an investment alternative to bonds.● The protection seller insures an underlying risk exposure (the reference entity) against a credit event,

such as bankruptcy or failure to pay. ● CDS credit events and bond defaults are generally aligned, but can differ (i.e. the conservatorship of

Fannie Mae and Freddie Mac triggered their CDS but did not result in bond impairments).● The protection buyer, in turn, must pay contractually-specified premiums.● However, unlike insurance, CDS contracts are actively traded in secondary markets.● CDS returns thus typically depend more on spread changes (and premium income) than a triggering of a

credit event. Spread tightening benefits the protection seller; spread widening benefits the protection buyer.

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CDS Spreads as Risk Indicators

• CDS spreads increasingly used for risk analysis

• ‘Market-implied’ view

• Updated frequently (e.g., daily)

• Applications: valuation, portfolio strategy, funding conditions

• Also provides an ‘alternative’ perspective of an entity’s creditworthiness

• E.g., Fitch uses in helping to identify credit ‘outliers‘

• Converting spreads to probabilities of default (PD)

• Assume 60% loss severity (i.e., 40% recovery rate)

• Annual CDS spread = 120 bps

• Thus, one-year probability of default = 2.0%

Probability of Default (1 yr) = CDS spread (annualized) / Loss Severity

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Background & Assumptions

• Data sourced from Fitch Solutions

• Monthly averages of daily (annualized) CDS spread observations

• Observations are excluded if based on low liquidity or if occurring after a credit event

• Fixed (rather than stochastic) recovery rate

• Higher loss severity assumption → lower implied PD

• Banks, insurance companies, homebuilders, REIT = 60% loss severity

• Monolines insurer = 80% loss severity

• Risk-neutrality

• Spreads do not embed risk premium beyond compensation for expected or average credit losses

• Of course, not necessarily the case in the ‘real world’

• Risk aversion

• Large downside of default events

• Concentration risk

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Overview of Findings

• CDS-implied PD for US sectors that experienced pronounced volatility during the crisis

• Analyzed PD trends during different phases of the crisis

• ‘Backtest’ of PD vs. subsequent realized defaults / credit events

Volatility in the Relative Risks of Sectors over the Crisis

June 2007 October 2008 March 2009 August 2010

Sector

CDS Spread (bps)

Implied PD (%) Sector

CDS spread (bps)


CDS spread (bps)


CDS spread (bps)

Implied PD (%)

HB 101 1.7 Monoline 1,656 20.7 Monoline 2,902 36.3 Monoline 1,527 19.1

REIT 40 0.7 REIT 607 10.1 REIT 1,081 18.0 REIT 275 4.6

Monoline 37 0.5 HB 447 7.5 Insurance 460 7.7 HB 249 4.2

Insurance 30 0.5 Bank 310 5.2 HB 313 5.2 Bank 161 2.7

Bank 26 0.4 Insurance 267 4.5 Bank 243 4.1 Insurance 151 2.5

HB − Homebuilder. Notes: The October 2008 and March 2009 periods illustrated above are intended to represent different points in time during the financial crisis and do not necessarily reflect peak CDS spreads for each sector. Figures above are annualized. Source: Fitch Ratings, Fitch Solutions.

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Monolines: A Closer Look

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Monolines — CDS Spreads and Implied PDs

(bps)

First Peak

Spread = 490 bps

Implied PD = 6.1%

Second Peak

Spread = 1,510 bps

Implied PD = 18.9%

Third Peak

Spread = 2,902 bps

Implied PD = 36.3%

• Spreads appeared to lead observable deterioration in credit fundamentals

• More than 60% of sample suffered a credit event / distress (i.e., CCC rating or lower)

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REIT and Homebuilders: A Closer Look

• Rise in implied PD, but no credit events in year following the peak

• PD for REITs increased by a multiple of 30x from trough to peak

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REIT Homebuilder


REIT and Homebuilders — CDS Spreads and Implied PDs

(bps)

First Peak (Homebuilder)

Spread = 385 bps

Implied PD = 6.4%

First Peak (REIT)

Spread = 409 bps

Implied PD = 6.8%

Second Peak (REIT)

Spread = 1,154 bps

Implied PD = 19.2%

Second Peak (Homebuilder)

Spread = 481 bps

Implied PD = 8.0%

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U.S. Banks and Insurance Companies

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Banks Insurance


Financial Services — CDS Spreads and Implied PDs

(bps)

First Peak (Banks)Spread = 427 bpsImplied PD = 7.1%

Second Peak (Banks)Spread = 247 bpsImplied PD = 4.1%

Peak (Insurance)Spread = 487 bpsImplied PD = 8.1%

• Only credit event (Washington Mutual) was coincident with 1st peak in implied PD

• Extraordinary external support (e.g. government assistance, acquisition)…

• …thus, senior debt obligations continued to perform, despite weakened condition

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U.S. Broker-Dealers

• Prior to crisis, spreads were relatively low for extended period

• As of October 2007, PD for sector was 1.1%...

• …however, several events of distress over ensuing 12-month period

• Highest CDS spread observed during period of study: Morgan Stanley (700 bps in October 2008)

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Goldman Sachs Group Lehman Brothers Holdings Inc.Merrill Lynch & Co., Inc. Morgan StanleyBear Stearns Companies Inc.

Note: CDS spreads in text boxes are aggregated for the broker-dealer sector as a whole and calculated as the average of the spreads of

the individual entities.Sources: Fitch Ratings and Fitch Solutions.

U.S. Broker-Dealer CDS Spreads by Entity

(bps)

October 2007CDS spreads = 68 bps

Implied PD = 1.1%

March 2008CDS spreads = 274 bpsImplied PD = 4.6%

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Differing Experience for US vs. European Banks

• US banks experienced more pronounced distress at peak

• More recent convergence (e.g., as of Dec 2010…Europe = 146 bps versus US = 125 bps)

Banks - US vs. Europe

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(bps) US (25 of the largest North American banks, including major regionals)

EUR (25 largest banks, drawn from the global Top 50 by assets)

September 2008

US spread = 427 bps

Implied PD = 7.1%

versus

EUR spread = 127 bps

Implied PD = 2.1%

Peak spread (EUR) = 184 bps

Implied PD = 3.1%

Implied PD = 3.3%

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European Banks (By Country)

• Relatively low implied PD during initial stages of the credit crisis

• Changes in ‘ordinal’ ranking over time (e.g., each has been the widest at some point since March 2009)

CDS Spreads By Select Country (based on 25 largest EUR banks)

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(bps)

France (4 banks) Germany (3 banks) Italy (2 banks) Spain (2 banks)

June 2007 (average)

Spread = 8 bp

Implied PD = 0.1%

June 2010 (Spanish banks)

Spread = 233 bp

Implied PD = 3.9%

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European Banks (Credit Events)

• Avg. implied annual PD 1-year prior to Credit Events: 4.1%

• Avg. implied annual PD 3-months prior to Credit Events: 10.9%

Credit Events - Spreads and Implied PD for Prior 12 Month Period

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Anglo Irish (Nov 2010) Bradford & Bingley (Jul 2009)Kaupthing (Oct 2008) Landsbanki (Oct 2008)Mean (four banks)

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European Insurance Companies

• No events of distress (e.g., default / downgrade to CCC or below) for insurers in this sample

Major European Insurers (sample of 17 entities)

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(bps)

March 2009 (peak)

Spread = 507 bps

Implied PD = 8.5%

June 2007

Spread = 12 bps

Implied PD = 0.2%

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Risk Management Implications

• CDS spreads can provide timely, market-based indicators of risk

• Particularly useful for valuation, active portfolio management, and assessing funding conditions

• In some cases, spreads lead observable credit deterioration (e.g., monolines during the crisis)

• Complement the informational content of other risk assessment tools (e.g., identifying outliers)

• Important to recognize the potential for ‘false positives’ and volatility

• For example, if used ‘peak’ spreads during crisis as a credit risk indicator, then either:

• Costly hedge

• Opportunity cost if sold off positions

• Additionally, both benefits and caveats in using spreads to derive PD estimates

• E.g., input to regulatory / economic capital calculations

• More ‘point-in-time’ view, but could undermine stability and reliability of results

• Procyclicality (higher PD → lower capital ratios → de-leveraging → further spread widening)

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Regulatory / Economic Capital Management (US example)

Volatility in CDS-Implied PD Could Drive Cyclicality in Basel Capital Charges (%)

Sector Period PD LGDa Reserves

(Expected Loss) Basel Capital Charge (Unexpected Loss)b

Expected Loss + Unexpected Loss

Trough 0.5 80 0.4 13.0 13.3 Peak 36.3 80 29.0 38.4 67.4

Monoline

Current 19.1 80 15.3 38.2 53.5 Trough 0.7 60 0.4 8.6 9.0 Peak 19.2 60 11.5 25.2 36.7

REIT


Homebuilder


Bank


Insurance

Current 2.5 60 1.5 16.0 17.6 aMonoline LGD is assumed to be higher than for the other sectors, consistent with the realized average final price from CDS auctions for monoline reference entities that have experienced a credit event. bThe Basel capital charges are based on the IRB formulae for each respective asset class and, for monolines, banks, and insurance companies incorporate the 25% upward adjustment in correlation values for financial institutions under the recent Basel III revisions. Capital charge calculations are based on an 8% total capital requirement, which is consistent with both the Basel II and Basel III calibrations (notes that Basel III capital calculations above do not reflect the capital conservation buffer of 2.5% that will be phased in over the next several years).

Source: Fitch Ratings, Basel Committee on Banking Supervision.

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Drivers of ‘Disconnects’ in Spreads vs. Fundamentals?

• Total return orientation of market participants (i.e., MTM value of CDS positions)

• Not necessarily reflective of longer-term horizon (e.g., one year) / fundamental credit risk

• CDS pricing can be driven by a number of factors not directly related to an entity’s

fundamental creditworthiness:

• Liquidity conditions

• Counterparty risk

• Risk aversion of market participants (i.e., ‘risk-neutrality’ assumption)

• Leverage inherent in CDS trading

“As the markets came under increasing strain on account of the financial turmoil, liquidity in the CDS markets also began to dry up, raising doubts as to their value as an indicator of risk and funding costs.”

European Central Bank, August 2009

Margining: A Closer Look

Margining Practices

CDS Leverage and Return Dynamics

Systemic Implications

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Margining: Some Definitions

• ‘Margin’ is security against a counterparty failing to perform on its obligations

• Bonds purchased on margin = amount by which bond’s market value exceeds loan to investor

• CDS = amount of collateral posted relative to market value (i.e., MTM) of the CDS contract.

• ‘Initial’ margin = size of “down payment” necessary to cover obligations under the CDS

contract

• Higher rates reduce both leverage and variability in return on capital (i.e., must commit more

‘capital’ against CDS exposure)

• Lower rates increase leverage / ROC variability

• ‘Re-margining’ = posting of variation margin to cover ∆ in MTM of the CDS contract

(i.e., restores margin relationship to initial rate)

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Determinants of Margin Rates

• Margin rates are typically higher for:

• Lower quality reference entities

• Riskier counterparties

• Longer-dated exposures

• CDS margin rates for protection buyers (short credit exposure) are typically lower

than for protection sellers (long credit exposure)

• Consistent with fundamental asymmetry in credit spread movements

• Typically managed on a portfolio basis

• Examples in this study focus on individual CDS positions (for illustrative purposes)

• ‘Re-margining’ also depends on valuation of underlying risk exposure

• Particular concern for CDS written on complex or illiquid assets (e.g., AIG)

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Margin Rates: Examples

Summary of Margin Rates for Investment-Grade Corporate Exposures (%)

Source CDS Bonds

IMF (April 2007) 1 0−3

IMF (August 2008) 5 8−12

Dealers (Estimate)a 5−7 10 Institutional Investors (Estimate) a 7 15 Garleanu/Pedersen 5 25

FINRAb 4−7 N.A.

Committee on the Global Financial System (June 2007)c N.A. 4−10

Committee on the Global Financial System (June 2009)c N.A. 10−20

aEstimates are based on Fitch discussions with a sample of dealers and institutional investors. The margin rates cited should be treated as general approximations of market practices and are not meant to reflect an industry standard, since practices tend to vary to some degree across institutions. bBased on FINRA rule 4240 margining grid for reference asset whose credit spread is between 0 bp and 300 bps and has a five-year maturity. cApplicable range of haircuts based on corporate bonds rated ‘BBB’ to ‘A’, with lower haircuts for prime and higher haircuts for unrated counterparties. Note that "haircuts" and "margin rates" are conceptually similar, but technically different. N.A. — Not applicable.

Sources: Committee on the Global Financial System, “The Role of Margin Requirements and Haircuts in Procyclicality,” (2010), Bank for International Settlements; Garleanu, Nicolae and Lasse Heje Pedersen, “Margin-Based Asset Pricing and Deviations from the Law of One Price,” (2009), mimeo; International Monetary Fund, “Global Financial Stability Report: Financial Stress and Deleveraging,” (2008); Securities and Exchange Commission, “Proposed Rule Change by Financial Industry Regulatory Authority Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934,” (2009).

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Margin Rates and Leverage / Return Dynamics

• Leverage magnifies 2.4% return on fully-funded cash position (if spreads tighten)…

• …but also amplifies the losses (in a spread widening scenario)

Margin Leverage, Exposure, and Return on Capital

Origination 50-bp Tightening 50-bp Widening

Credit Spread (bps) 100 50 150 Yield (%) 2.50 2.00 3.00

Bond (Noncallable) Initial Margin (i.e. Capital) ($) 1,000,000 1,000,000 1,000,000 Margin Rate (% of Notional) 10.0 10.0 10.0 Initial Exposure ($) 10,000,000 10,000,000 10,000,000 Borrowed Amount ($) 9,000,000 9,000,000 9,000,000 Bond Market Value ($) 10,000,000 10,236,783 9,769,445 Appreciation/Depreciation ($) 0 236,783 (230,555)

Return on Capital (%) 23.7 (23.1)

CDS Protection Seller Initial Margin (i.e. Capital) ($) 1,000,000 1,000,000 1,000,000 Margin Rate (% of Notional) 5.0 5.0 5.0 Initial Exposure ($) 20,000,000 20,000,000 20,000,000 CDS MTM ($) 0 491,994 (471,778)

Return on Capital (%) 49.2 (47.2)

The analysis above assumes: each instrument has a five-year tenor; both CDS and bond spread movements are identical; the CDS MTM is based on Treasury curve as of Aug. 4, 2010 and the on-the-run CDS contract; the market spread equals the deal spread when the contract is initiated, and as such, there is no upfront MTM payment; and the change in spreads is instantaneous and the returns therefore do not reflect contractual cash flows (e.g. CDS premiums or funding costs on the bond).

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Margin Rates and Leverage / Return Dynamics

• Investor’s return on capital ‘profile’ is highly sensitive to initial margin rates.

• Higher margin rates would substantially reduce return variability

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Return on Capital (100-bp Initial Spread; 50-bp Tightening; Five-Year Maturity)

Return on Capital (100-bp Initial Spread; 50-bp Widening; Five-Year Maturity)

Margin Rate (%)

Margin Rates and Return on Capital (CDS Protection Seller)

Return on Capital (%)

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Re-Margining and Leverage / Return Dynamics

• Redeployment of gains → build-up of credit exposure during positive environments?

• Re-margining losses → negative cycle of losses / distressed selling / counterparty risk?

Re-Margining and Redeploying Investor Capital

Origination Spreads Tighten by 50 bps Spreads Widen by 50 bps

Credit Spread (bps) 100 50 150 Yield (%) 2.50 2.00 3.00

Bond (Noncallable)

Initial Margin (i.e. Capital) ($) 1,000,000 1,000,000 1,000,000 Margin Rate (% of Notional) 10.0 10.0 10.0 Appreciation/Depreciation ($) 0 236,783 (230,555)

New Margin Amount ($) 1,236,783 769,445 New Exposure (Market Value) ($) 10,000,000 12,367,830 7,694,450

CDS protection seller Initial margin (i.e. Capital) 1,000,000 1,000,000 1,000,000

Margin rate (% of Notional) 5.0 5.0 5.0 CDS MTM ($) 0 491,994 (471,778)

New Margin Amount ($) 1,491,994 528,222 New Exposure (Notional) ($) 20,000,000 29,839,880 10,564,440

Note: This analysis assumes that investors close out the original position and immediately redeploy the initial capital plus gains realized (in the case of spreads tightening) or initial capital less the loss realized (in the case of spreads widening). In the case of CDS, it is also assumed that investor capital is redeployed in a new CDS contract possibly referencing a different entity where the market spread is very close or equal to the contract spread so as to limit the impact on the analysis of any theoretical transfer of the MTM amount between investor and counterparty at the time the swap is entered into; also not considered in this analysis is any impact related to the transfer of accrued income.

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Changes in Margin Rates During Stress

• From dealer’s perspective → buffer to weather further spread / counterparty erosion

• For margined investors → amplifies de-leveraging and liquidity pressures

• Appears to pose more of a risk for leveraged bond investors

• Margin rates may be reset at relatively short intervals (i.e., term of securities financing)

• For bilateral CDS, fixed initial margin rate for life of the contract…

• …however, can (in effect) increase if counterparty’s financial condition weakens (i.e., lowering of

margining threshold, or unsecured credit exposure available)

Increasing Margin Rates Under Stress: A Shock to the System?

Bond (Noncallable) Stable Margin Rate Dynamic Margin Rate

Spread Widening (bps) 50 bps 50 bps Initial Margin (i.e. Capital) ($) 1,000,000 1,000,000 MTM loss ($) (230,555) (230,555) Residual margin (i.e. Capital) after MTM Loss ($) 769,445 769,445 Margin Rate (%) 10.0 20.0 Exposure (Market Value) ($) 7,694,450 3,847,225 Net Bonds Sold to Meet Margin Call ($) (2,074,895) (5,922,220)

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Systemic Implications

• Three potential sources of pro-cyclicality:

• Low initial margin rates (i.e., investors can build large positions)

• Re-margining (i.e., investment losses and gains can be magnified)

• Changes in margin rates under stress (increase in collateral buffers might inadvertently trigger

liquidity pressure)

• Even cash investors that do not employ leverage can be exposed to pricing volatility

stemming from reliance by some investors on margin financing

• CDS spread volatility (which might partly be explained by margin rates) could create

negative feedback loop for some issuers

• If financial reforms / movement to CCP were to result in higher margin requirements,

CDS leverage would likely be reduced

• …less spread volatility?

Appendix: Select Research on Other Topics

US Money Fund Exposure to European Banks

‘Burden-sharing’

Samples Used in CDS Analysis

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MMFs Reduced Exposure Prior To Recent VolatilityMMF Exposure to European Banks

(as % of total assets under management for ten largest MMF)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2H06

1H07

2H07

1H08

2H08

1H09

2H09

1H10

2H10

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Ireland SpainPortugal ItalyEurope total (right axis) UK, France, Germany (right axis)

Source: U.S. Money Market Funds: Recent Trends in Exposure to European Banks

(Fitch Macro Credit Research, December 10, 2010)

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Regional Variation in MMF Exposure to Banks

Ireland Italy Portugal Spain UK France Germany Benelux Swiss Nordic

Europe

(total) Japan Oceania

North

America

2H06 0.4% 1.2% 0.0% 0.4% 8.8% 7.5% 6.2% 4.6% 2.1% 2.0% 34.2% 2.6% 1.1% 11.4%

1H07 0.3% 0.7% 0.0% 0.3% 8.1% 7.0% 5.9% 5.2% 4.0% 1.9% 33.9% 2.1% 1.5% 10.7%

2H07 0.6% 0.7% 0.1% 1.3% 10.4% 6.1% 3.5% 6.2% 3.4% 2.6% 35.1% 1.7% 1.5% 14.1%

1H08 1.5% 2.3% 0.0% 2.2% 8.3% 8.1% 2.3% 5.0% 1.9% 2.4% 34.9% 1.1% 2.6% 10.0%

2H08 0.5% 2.7% 0.0% 3.2% 8.4% 9.8% 1.8% 4.7% 1.9% 3.0% 36.0% 0.8% 3.1% 14.5%

1H09 0.0% 3.0% 0.5% 3.0% 8.3% 13.5% 3.1% 5.6% 1.9% 3.8% 42.7% 3.5% 3.2% 10.7%

2H09 0.4% 3.2% 0.3% 2.9% 8.1% 14.4% 4.4% 6.9% 0.9% 4.6% 46.1% 4.6% 5.3% 8.2%

1H10 0.0% 1.9% 0.0% 1.7% 7.0% 10.8% 4.6% 6.0% 1.2% 4.6% 37.5% 4.0% 4.8% 8.5%

2H10 0.0% 1.8% 0.0% 1.3% 6.4% 11.9% 4.3% 6.6% 1.5% 4.9% 38.7% 4.9% 5.4% 7.0%

MMF Exposure to Bank CDs and CP

(as % of total MMF assets under management)

Note: “Europe (total)” column in table above does not necessarily equal the exact sum of the European countries listed because of (1) rounding errors and (2) the exclusion of countries to which the MMFs sampled were not highly exposed

over the observation period.

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Changes in the Largest Single-Name Bank Exposures

As of 2H 2007…

% of Total

MMF assets As of 2H 2010…

% of Total

MMF assets

Citibank 3.6% BNP Paribas 3.1%

Barclays 3.4% Rabobank 3.0%

JP Morgan Chase 2.7% Credit Agricole 2.8%

HBOS 1.9% ING 2.5%

Societe Generale 1.9% Natixis 1.9%

Bank of America 1.9% Westpac 1.9%

UBS 1.7% Societe Generale 1.7%

ABN AMRO Bank 1.7% RBS 1.5%

RBS 1.5% Nordea Bank 1.3%

Fortis Bank 1.4% HSBC 1.3%

% of exposure represented by Certificates of Deposits (CD):

• Citibank (as of 2H 2007): 8%

• BNP Paribas (as of 2H 2010): 91%

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Burden-sharing: External Support vs. Hybrids / Sub Debt

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Bank Risk Capital If Equity

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Hybrids

360

Subordinated

Debt

660

1,1101,020

Note: figures in chart are in (€1,000,000)

Source: Burden Sharing: Who Pays Next Time? (Fitch Macro Credit Research,

May 10, 2010)

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34


Appendix: Sample for US CDS Analysis

Bank Insurance Monoline REIT Home Builder Bank of America Corporation Aetna Inc. Ambac Financial Group, Inc. AMB Property LP Centex Corporation Bank of New York Co Inc. AFLAC Incorporated Assured Guaranty Corp. Archstone-Smith Operating

Trust D R Horton Inc.

Bank One Corporation Allstate Corporation FGIC Corporation Avalon Bay Communities Lennar Corporation BB&T Corporation American Financial Group, Inc. Financial Security Assurance

Inc. BRE Properties, Inc. M.D.C. Holdings, Inc.

Canadian Imperial Bank of Commerce

American International Group Inc.

MBIA, Inc. Camden Property Trust NVR Inc

Capital One Financial Corporation

Anthem Insurance Companies Inc.

MGIC Investment Corporation Developers Diversified Realty Corporation

Pulte Homes, Inc.

Citigroup Inc. Assurant Inc. Radian Group Inc. Duke Realty LP Ryland Group, Inc. Fifth Third Bancorp AXA Financial Inc. The PMI Group, Inc. Equitable Resources, Inc. Toll Brothers, Inc. JPMorgan Chase & Co. Berkshire Hathaway Inc. Equity One Inc KeyCorp Chubb Corporation Federal Realty Investment

Trust

Marshall & Ilsley Corp CIGNA Corporation First Industrial LP Mellon Financial Corporation First American Corporation Health Care Property

Investors, Inc.

National Bank of Canada Genworth Financial Inc. Health Care REIT, Inc. National City Corp Hartford Life, Inc. Healthcare Realty Trust

Incorporated

PNC Financial Services Group, Inc

Horace Mann Educators Corp Highwoods Realty LP

Popular, Inc. John Hancock Financial Services Inc.

Hospitality Properties Trust

Royal Bank of Canada Liberty Mutual Insurance Companies

HRPT Properties Trust

Sovereign Bancorp, Inc. Lincoln National Corporation iStar Financial Inc. State Street Corporation Manufacturers Life Insurance

Company Kimco Realty Corporation

SunTrust Banks Markel Corporation Liberty Property LP Toronto Dominion Bank Marsh & McLennan Companies,

Inc. Mack-Cali Realty Corporation

U.S. Bancorp Massachusetts Mutual Life Insurance Company

National Retail Properties Inc

Wachovia Corporation MetLife, Inc. New Plan Excel Realty Trust, Inc. (acquired by Centro in 2007)

Washington Mutual Incorporated Nationwide Financial Services, Inc.

ProLogis

Wells Fargo & Co New York Life Insurance Company

Regency Centers, L.P.

Pacific Life Insurance Co United Dominion Realty Trust, Inc.

Principal Financial Group Vornado Realty Trust Prudential Financial Inc. Washington Real Estate

Investment Trust

Safeco Corporation Weingarten Realty Investors The Progressive Corporation The St. Paul Travelers Group of

Companies, Inc.

Torchmark Corporation Unitrin, Inc

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Appendix: Sample for EUR CDS Analysis

Bank Insurance

ABN AMRO Bank NV Aegon N.V.

Banca Intesa SpA Allianz AG

Banco Bilbao Vizcaya Argentaria SA Assicurazioni Generali SpA

Banco Santander Central Hispano Aviva Plc

Bank of Scotland AXA

Barclays Bank plc Hannover Rueckversicherungs-AG

Bayerische Landesbank Girozentrale ING Groep NV

BNP Paribas Legal & General Group plc

Commerzbank AG Munich Re

Credit Agricole SA Old Mutual Plc

Credit Suisse Group Prudential plc

Danske Bank AS Royal & Sun Alliance Insurance plc

Deutsche Bank AG SCOR

Fortis SA/NV Standard Life Assurance Company

HSBC Holding plc Swiss Life Holding

ING Bank NV Swiss Reinsurance Co

Lloyds TSB Group plc Zurich Financial Services AG

Natixis

National Westminster Bank plc

Nordea Bank AB

Rabobank Nederland

Royal Bank of Scotland plc

Societe Generale

UBS AG

Unicredito Italiano SpA

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CDS Spreads as Default Risk Indicators - Feb 2011

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