MARKET ATTRIBUTES CDS

April 2012

S&P/ISDA CREDIT DEFAULT SWAP INDICES

S&P Indices Market Attributes Series provides market commentary highlighting developments across various asset classes. Analysis. Research. Education. www.spindices.com CDS Indices Contributor: Mike Kondas, CFA Associate Director michael_kondas@sandp.com

After a torrential March for the CDS market, April proved to be a cool spring day. Spreads were generally higher, with only the S&P/ISDA CDS U.S. Homebuilders Select 10 Index spread dropping, down 9 basis points (bps), a 3% improvement in its credit spread. At the other end of the spectrum, the S&P/ISDA CDS U.S. Financials Select 10 Index was the worst relative performer; its spread widened by 13%, a 21-bps jump. Weakness continued in the eurozone, with sovereign and bank spreads continuing to deteriorate. The S&P/ISDA Eurozone Developed Nation Sovereign CDS Index jumped to 266 bps and the S&P/ISDA CDS European Banks Select 15 Index rose to 277 bps. At 277 bps, this represents the highest index spread in the S&P/ISDA CDS family. Proving to be resilient to the market conditions, the S&P/ISDA CDS U.S. Healthcare Index rose by just over one-half of a basis point, remaining at 70 bps this month. With the market somewhat stabilized after a short-term resolution for Greece was implemented in March, market participants moved their attention to the daunting task of complying with the imminent regulations on mandatory clearing in the U.S. and Europe. The month concluded with the ISDA Annual General Meeting in Chicago. The highlight of the meeting was the sparked debate with CFTC Chairman Gary Gensler.

S&P/ISDA CDS Index Data as of April 30, 2012 S&P/ISDA CDS U.S. Benchmark Index
100 CDS U.S. Investment Grade U.S. High Yield

Weighted Average Market Spread as of

4/30/2012 78 104 529 3/30/2012 74 98 510 12/30/2011 101 141 698 9/30/2011 107 159 836

Spread Change (%)

MTD 5 6 4 YTD -23 -27 -24 since 9.30.11 -27 -35 -37 since 9.30.11 -42 -16 -10 -12 -29 -34 -9 since 9.30.11 -51 -30

S&P/ISDA CDS Select Sector Index

U.S. Homebuilders 10 U.S. Consumer Discretionary 20 U.S. Consumer Staples 10 U.S. Energy 10 U.S. Healthcare 10 U.S. Financials 10 European Banks 15

Weighted Average Market Spread as of

4/30/2012 272 240 173 230 70 179 277 3/30/2012 281 230 170 218 70 158 257 12/30/2011 357 243 163 243 98 248 319 9/30/2011 471 285 192 262 99 274 305

Spread Change (%)

MTD -3 5 2 5 1 13 8 YTD -24 -1 6 -5 -28 -28 -13

S&P/ISDA Sovereign CDS Index

International Developed Nation Eurozone Developed Nation

Weighted Average Market Spread as of

4/30/2012 218 266 3/30/2012 212 241 12/30/2011 581 461 9/30/2011 440 381

Spread Change (%)

MTD 3 10 YTD -63 -42

Source: S&P Indices. Data as of April 30, 2012. Charts are provided for illustrative purposes. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

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MARKET ATTRIBUTES | CDS

S&P/ISDA CDS U.S. BENCHMARK INDICES

After a phenomenal start to the year, U.S. equity markets cooled in April. The S&P 500 was down 0.63% this month, bringing its year-to-date (YTD) total return down to just under 12%. As is usually the case when equity markets fall, CDS spreads rose. The S&P/ISDA 100 CDS Index spread rose 4 bps in April and now sits just under 78 bps. After the auction for Greek debt was final, spreads hit their YTD low on March 21 and then reversed trend. Is this rising trend a signal for things to come? Even with the recent rise, S&P/ISDA 100 CDS Index spreads still improved by 23 bps over the first four months of 2012. The S&P/ISDA CDS U.S. Investment Grade Index continues to exhibit a strong correlation to the S&P/ISDA 100 CDS Index (see Exhibit 2). For the month, the investment-grade index spread rose 6 bps. On the year, the spread has fallen 37 bps, a 27% improvement, which is the greatest relative improvement among the three benchmark S&P/ISDA CDS indices. Since the end of 2010, the S&P/ISDA CDS U.S. Investment Grade Index spread has averaged 36 bps higher than the spread of the S&P/ISDA 100 CDS Index (see Exhibit 2). By the end of April, the spread differential had increased marginally to 26 bps from 23 bps at the end of March, but remained well below the average spread differential for the period shown. . This change in spread differential tracks with historical data, implying that lowerquality spreads tend to rise faster on a relative basis when there is overall weakness in the credit markets. Exhibit 2: S&P/ISDA U.S. Benchmark CDS Index Historical Spreads

Source: S&P Indices. Data as of April 30, 2012. Charts are provided for illustrative purposes. Past performance is not a guarantee of future results.

Although the 19-basis point rise in the S&P/ISDA CDS U.S. High Yield Index spread is the largest gross spread deterioration among the benchmark indices, the 4% increase is the lowest on a percentage basis. The par spread of Radian Group rose over 600 bps in April, now sitting just under 2,100 bps. Generally, when par spreads are north of 600 bps, the CDS for that entity will trade on an upfront basis. Considering Radian, this means the protection buyer is willing to pay 40% of notional on the settlement date plus a coupon of 500 bps for the life of the swap to guard against a default. The biggest movers to the positive side were Levi Strauss and SuperValue, both of which had CDS par spread improvement of over 90 bps. However, SuperValue is still trading with an upfront payment. At month-end, the upfront for SuperValue was 14%, considerably lower than the 40% for Radian. When S&P Indices analyzes par spreads or upfront payments, the higher the value, the higher the probability of default. According to CMA Datavision, the cumulative probability of default is 72% and 49%, respectively, for Radian and SuperValue. To see the list of constituents for all of the S&P/ISDA CDS indices, please visit our website, www.fixedincomeindices.standardandpoors.com or contact us at index_services@standardandpoors.com.

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MARKET ATTRIBUTES | CDS

S&P/ISDA SOVEREIGN CDS INDICES

Activity in the sovereign markets is still high, but nowhere close to what it was during the frantic resolution of the Greek debt swap arrangement and subsequent declaration of a credit event by the EMEA Determinations Committee. Greece was removed from both S&P/ISDA Sovereign CDS indices in March. Therefore, spreads for both indices dropped immediately. In April, the S&P/ISDA Eurozone Developed Nation CDS Index spread jumped 25 bps, a 10% credit deterioration. The sister S&P/ISDA International Developed Nation CDS Index increased by a much smaller 6 bps. Considering that all of the nations in the S&P/ISDA Eurozone Developed Nation CDS Index are also in the S&P/ISDA International Developed Nation CDS Index, this 6-basis point move is almost entirely a result of the European debt crisis. Japan, the largest constituent in the International basket, had a spread decline of 6 bps in April. Market participants have definitely changed their focus in Europe since the Greek bond swap finalized. Although Portugal still has the highest par spread, the trend has been very positive. At month-end, the CDS par spread for Portugal traded south of 1,000 bps, according to CMA Datavision. As recently as mid-March, the par spread was approaching 1,500 bps. Since that March high point, Portugal par spreads have dropped more than 450 bps. Spain, Italy and France had the largest spread increases this month. Since the end of February, par spreads for Spain have risen more than 100 bps. Over the same period, spreads for Italy and France have risen 61 bps and 17 bps, respectively. Considering that these three countries account for over 50% of the index, it is easy to see why spread levels for the S&P/ISDA Eurozone Developed Nation CDS Index are rising relative to the sister index.

S&P/ISDA CDS SELECT SECTOR INDICES

Sector CDS spreads were generally higher in April, with only the S&P/ISDA U.S. Homebuilders Select 10 Index dropping 9 bps this month. On the year, its spread has fallen 85 bps, indicating an improvement of 24%. Within the S&P/ISDA U.S. Homebuilders Select 10 Index, spreads improved for seven out 10 reference entities. Spreads for KB Home, Lennar Corp. and Ryland Group all dropped at least 20 bps. U.S. financials were the best-performing sector in March. In April, U.S. financials were the worst performing, indicating some measure of mean reversion in spreads. The spread of the S&P/ISDA CDS U.S. Financials Select 10 Index rose 21 bps in April, but is still down 69 bps on the year, equivalent to a 28% YTD improvement. This improvement makes it and U.S. Healthcare the best performing sectors on a percentage basis this year. The S&P/ISDA CDS U.S. Healthcare Select 10 Index spread moved marginally higher, not quite even a single basis point. Sitting at 70 bps, the S&P/ISDA CDS U.S. Healthcare Select 10 Index currently has the tightest spread in the S&P/ISDA CDS Index family. Exhibit 3: S&P/ISDA CDS U.S. Select Sector Index Historical Spreads

Source: S&P Indices. Data as of April 30, 2012. Charts are provided for illustrative purposes. Past performance is not a guarantee of future results. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance. McGRAW-HILL

MARKET ATTRIBUTES | CDS

Exhibit 4: S&P/ISDA Sector CDS Historical Spreads: European Banks and U.S. Financials

Source: S&P Indices. Data as of April. 30, 2012. Charts are provided for illustrative purposes. Past performance is not a guarantee of future results. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

From early December 2011 into February 2012, CDS spreads declined for both the U.S and European banks as the market began to anticipate a managed resolution of the Greece bailout and debt swap initiatives. The European Banks Select 15 Index, however, had higher volatility. suggesting that market participants were much more concerned with the potential ramifications of a Greek default on the European banks as compared to their U.S. counterparts. As bondholders began to agree to the terms of the Greek debt restructuring proposal and a short-term resolution became clearer, the marketplace became less concerned with broad strains on the European sector. On March 9, the ISDA EMEA Determination Committee declared a credit event had occurred. The auction for Greek bonds was held on March 19, resulting in a settlement price of 21.5% of the bonds face value. Index spread levels hit their lowest level since August 2011, with some degree of certainty finally being obtained for the investors of Greek debt. As with most markets, CDS market participants are always looking ahead to the next area of concern. With the Greek debt crisis somewhat resolved, Spain, Portugal and Italy have moved to the forefront. Sovereign CDS spreads for these countries have widened considerably in recent weeks. The S&P/ISDA Eurozone Developed Nation Sovereign CDS Index spread has widened by 38 bps since the March 19 low. Not too surprising, the European Banks Select 15 Index jumped 20 bps in April. When looking at the period from March 19 to April 30, the European Banks Select 15 has risen 65 bps while the U.S. Financials Select 10 has gone up only 33 bps. The marketplace is implying the European Banking sector still has a great deal more exposure to the continuing sovereign crisis in the Eurozone. The spread differential between the European and U.S. sectors was 97 bps on April 30 (much higher than the average of 65 bps seen over this sample period). The spread differential was 66 bps on March 19.

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PERFORMANCE DISCLOSURES
The inception date of the S&P/ISDA CDS U.S. Consumer Discretionary Select 20, S&P/ISDA CDS U.S. Consumer Staples Select 10, S&P/ISDA CDS U.S. Energy Select 10 and S&P/ISDA CDS U.S. Healthcare Select 10 Indices was June 30, 2010, at the market close. The inception date of the S&P/ISDA CDS U.S. Homebuilders Select 10 Index was March 22, 2010, at the market close. The inception date of the S&P/ISDA CDS U.S. Financials Select 10 and S&P/ISDA CDS European Banks Select 15 indices was March 20, 2012, at the market close. All information presented prior to the index inception date is back-tested. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.indices.standardandpoors.com. The inception date of the S&P/ISDA International Developed Nation Sovereign CDS Index and the S&P/ISDA Eurozone Developed Nation Sovereign CDS Index was October 25, 2010, at the market close. All information presented prior to the index inception date is back-tested. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.indices.standardandpoors.com. Past performance is not an indication of future results. Prospective application of the methodology used to construct the indices may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the index. Please refer to the methodology paper for the index, available at www.standardandpoors.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. It is not possible to invest directly in an Index. Also, another limitation of hypothetical information is that generally the index is prepared with the benefit of hindsight. Back-tested data reflect the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities (or fixed income, or commodities) markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance. The index returns shown do not represent the results of actual trading of investor assets. Standard & Poors maintains the indices and calculates the index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back-tested performance to be lower than the performance shown. In a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US$ 10,000) and an actual asset-based fee of 1.5% were imposed at the end of the period on the investment plus accrued interest (or US$ 1,650), the net return would be 8.35% (or US$ 8,350) for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US$ 5,375, and a cumulative net return of 27.2% (or US$ 27,200).

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