INTERNAL USE ONLY DO NOT DISTRIBUTE IN PART OR IN WHOLE Structured Finance > Mortgage Credit CMBS: Extension Protected Duper Tranches Updated: Oct 26, 2015 Trade Idea: o Purchase extension protected senior bonds from recently issued CMBS transactions, priced at -2 bps inside of the last cash flow senior tranche but offering significant structural benefits Investment Rationale: o Credit enhancement: These classes are the "duper" tranche of CMBS deals, offering 30% credit support and significant protection above and beyond expected pool losses. 0 Structural attributes: Recently issued CMBS transactions have low coupon rates on the underlying loans, which typically mature in 10 years, and relatively low cap rates supporting current CRE valuations. There is a concern that as rates move higher, refinancing becomes more difficult due to increasing debt service requirements and/or lower valuations due to higher cap rates, which would result in extension of cash flows due to modifications and/or workouts once loans reach maturity. As a result, structures have evolved to include a tranche that has a similar average life as the last cash flow bond but gets priority on repayment of principal due to maturity and/or liquidations, offering a much more stable cash flow profile. o Relative value: These tranches typically price 2 bps inside of the last cash flow senior tranche, which we believe is a very cheap pay-up for the structural benefit. We believe that as rates rise, the market will begin to recognize the benefit of this structure and the differential between this class and the last cash flow senior tranche will widen materially. Recommendation(s): V,ew Trade Horizon Deal B Tranche Into Ratings Buy 12+ Months JAMBS 2015-C32 itaaMANPANAVIA (moody'sr Frlch 0BMSI Kroll Cueip Average Life i *Frannie Par Spread to Swaps Price Current At iltry to Source :art Smiler 46590JAVS Duration 9/010.18 $100ren 125 101 13+95000Se • As of 10'26/15 62 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0075518 SDNY_GM_00221702 EFTA01378349