Regency Centers Corporation: Unsecured REIT Debt Evaluation

REG.GL / CUSIP: 75884RAQ

REAL1-GC 1095 Capital Markets

Standard & Poor's

REG.GL / CUSIP:
75884RAQ6
Last: 114.772

Yield: 2.215%

Security Category:

Corporate

Issue Description:

Note

Issuer Name

REGENCY CTRS LP

Coupon Rate:

5.875

Coupon Type:

Fixed

Maturity Date:

06/15/2017

Pay Frequency:

Semi-annual

First Coupon Date:

12/15/2007

Offer Price

$99.527

Offer Size

$400,000,000

Yield to Maturity

5.017%

Offer Date:

5/31/2007

Settlement Date:

6/05/2007

Amount Outstanding

$400,000,000

Call Frequency

Continuous

Underwriter Fee

$2,600,000

High Price /
Equivalent Yield:

$114.772 /
2.21500%

Low Price /
Equivalent Yield

$114.641 /
2.24500%

Net Change (Price)

$0.136

Int Payment Dates

12/15 & 6/15

Jonathan Smith

BBB
4/12/2012
Moodys Investor Service

Baa2
1/13/2011

Regency's liquidity is good, exemplified by a $600 million line of credit which typically has
significant availability, an unencumbered portfolio representing 70% of assets and a reasonable
FFO payout ratio of 76%. Leverage metrics are high (49% debt plus preferred over gross assets,
6.3x net debt/ EBITDA) and even higher when considering joint ventures (Regency's coinvestment partnerships), though we expect these metrics to decline. Likewise, fixed charge
coverage is 2.0x, and we expect this to improve.
Moody's would expect to raise Regency's ratings should strong operational performance
continue and fixed charge coverage (including joint ventures) tally consistently above 2.5x,
coupled with effective leverage below 50% (including joint ventures), net debt to EBITDA below
6x, and development less than 20% of gross assets.
Conversely, Moody's said that pressure to lower Regency's rating would likely result from
effective leverage (including joint ventures) near 60% or net debt/EBITDA greater than 7x,
coupled with development exposure over 20% of gross assets over several quarters. A decline in
all-in fixed charge coverage (with joint ventures) below 2.0x would also negatively impact the
rating.

Fitch Rating

BBB
4/12/2012

REG has a manageable debt maturity schedule, with no year accounting for more than 21%
of total maturing debt. This laddering enhances the company's liquidity profile.
REG s sources of liquidity exceed uses of liquidity by 1.2x. Under a scenario whereby 80 %
of REGs pro rata share secure debt is refinanced with new secured debt, liquidity coverage
improves to 1.5x. The company has demonstrated strong access to the common equity,
unsecured and secured debt and preferred stock market, mitigating near-term refinance
risk
In addition, the company has good contingent liquidity in the form of a sizeable
unencumbered asset pool. Using an 8.0% capitalization rate, the implied value of
unencumbered assets covered net unsecured debt by 2.3x, which is adequate for the 'BBB'
rating, and the company's unsecured debt covenants do not restrict REG's financial
flexibility.

REAL1-GC 1095 Capital Markets

REGENCY CREDIT PROFILE

Bond Details

There appears to be a positive fundamental outlook on the retail REIT sub-industry. Increased absorption of retail space should present retail landlords
with more pricing power. Consumer spending and retail sales should continue to improve over the next year. There appears to be general consensus
that same property revenue and net operating income will be positive across the sub-industry over the next 12 months. Results of retail REITs in the
fourth quarter of 2012 suggest that business continues to improve. Occupancy levels generally improved on a year over year basis; re-leasing spreads
were generally better. The shopping center products continue to lag behind regional malls.
Furthermore, there appears to be sharp drop-offs in development and transaction-oriented activities abating as the economy rebounds and concerns
ease. Analysts expect tight credit conditions, though not as restrictive as they were at the height of the financial crisis in late 2008 and 2009, to continue
to squeeze smaller, undercapitalized players from the market as larger retailers seek to do business with shopping center operators that can execute in a
still tight and volatile credit environment. Consequently, the exit of smaller, undercapitalized players will help reduce prices for lesser-quality shopping
center assets, analysts expect that demand for well-located, quality assets will remain firm. Publicly traded retail REITs generally own quality assets and
this helped some that were not as well-capitalized to secure debt as well as equity financing to ride out the storm. Although REITs tend to be highly
leveraged, most of this leverage is mortgage debt, which is secured by the underlying properties, and lenders have generally been refinancing this debt.
The concerns sell-side analysts express about a retightening of the credit market is worrisome for the retail REIT sector; not because it will
greatly restrict access to capital for institutional firms, but because the yields necessary to facilitate investment in retail property assets, without
a strong consumer recovery, is reliant on cheap debt. Much of the gain in REIT total return has been attributable to capital appreciation. Just as
with any highly levered investment, a small change in debt cost can cause a sizable increase in volatility.
Current Income

Jonathan Smith

Capital Appreciation

REAL1-GC 1095 Capital Markets

SELL SIDE SENTIMENT PROFILE

Retail REIT market Sell Side Sentiment

$40,000

$Millions

$35,000

$30,000
$25,000
$20,000
$15,000
$10,000

Annualized

$5,000
$0

As displayed in the chart above, Historic Public Debt Announcements are decreasing on an annualized basis. This trend should continue if debt costs
continue to rise and consumer fundamentals continue to lag asset price appreciation; thereby depressing yield.
Regency Centers Debt Maturity

Probability of Default from Bond Term Structure Simulation

100%
90%
80%
70%
60%
50%

Upcoming Maturities
Issuing Company
Regency Centers Corporation
Regency Centers Corporation
Regency Centers Corporation
Regency Centers Corporation
Regency Centers Corporation
Regency Centers Corporation
Regency Centers Corporation

Funding
Key
Funding Type
148759 Senior Debt
154976 Senior Debt
182182
443528 Credit Facility - Term Loan
187173 Senior Debt
227009 Senior Debt
233275 Senior Debt

Issue
Currency
$
$
$
$
$
$
$

Original Issue
Date
4/1/2004
11/1/2005
2/9/2007
11/17/2011
6/5/2007
6/2/2010
10/7/2010

Coupon/ Rate
4.9500
5.2500
Variable
Variable
5.8750
6.0000
4.8000

Amount Out
($000) Maturity Date
150,000 4/15/2014
350,000 8/1/2015
90,800 9/5/2016
100,000 12/15/2016
400,000 6/15/2017
150,000 6/15/2020
250,000 4/15/2021

Ratings
Moody's/S&P/Fitch
Baa2/BBB/BBB
Baa2/BBB/BBB
-/-/-/-/Baa2/BBB/BBB
Baa2/BBB/BBB
Baa2/BBB/BBB

Bond
1
2
3
4
5

Maturity Date
4/15/2014
8/1/2015
6/15/2017
6/15/2020
4/15/2021

Price (out of $100)

$104.04
$108.96
$114.64
$115.71
$110.71

Coupon
4.950%
5.250%
5.875%
6.000%
4.800%

Yield Interp RfR Price of RfR Bond

1.252% 0.162%
105.27
1.432% 0.292%
111.84
2.257% 0.637%
122.03
3.531% 1.304%
132.47
3.284% 1.492%
125.16

Default Prob
Monthly
0.143%
0.213%
0.338%
0.443%
-0.549%

Regency Centers has a large amount of its public debt coming due in the next 4 years. Due to strict debt covenants it will most likely issue new debt
later than sooner where it can be expected that debt rates will be more expensive. Based on a simulation of company default constructed from
Regencys bond term structure, the greatest risk of default takes place near their 2020 bond maturity.
Jonathan Smith

REAL1-GC 1095 Capital Markets

HISTORICAL DEBT ISSUANCE ANALYSIS

US REIT Historical Debt Announcements

COMMONWEALTH REIT 2007 6 1/4% 15/06/17 S - MARKET PRICE

14.00%
US TREASURY 2007 4 1/2% 15/05/17 C-2017 - MARKET PRICE

12.00%

REGENCY CENTERS LP. 2007 5 7/8% 15/06/17 S - MARKET PRICE

10.00%

WEINGARTEN REAL. 2006 5.542% 15/12/16 S-A - DEFAULT PRICE

EQUITY ONE INCO. 2006 6% 15/09/16 S - DEFAULT PRICE

8.00%

FEDERAL REALTY IT. 2006 5.4% 01/12/13 S - DEFAULT PRICE

6.00%
4.00%
2.00%
0.00%

Regency Bond Issuance Comps and T-Bond Spread Analysis

Risk Premium from CDS Spreads Simulation

REG Spread.

Periodic Probability of
Default

Cumulative Probability
of Default

Annual Default
Probability

.012%

5.85%

1.46%

Coupon

Current
Yield

YTM

US T-Bond

4.50%

3.89%

0.70% 1.23%

1.56%

Regency Center

5.88%

5.12%

2.27% 1.26%(1)

3.89%(2)

Weingarten Real

5.54%

5.02%

2.92% 0.11%

-0.66%

Par (Dollars)

6%

5.30%

2.70% -0.18%

-0.44%

5.40%

5.23%

4.56% 0.13

-1.08%

Bond Issuance

Equity One
Federal Realty
Average of Comps

CY

0.02%

YTM

-0.72%

Variable

(1)
(2)

2.40%

Common Method

$1,300,000

Market Value

Upfront Payment (bps)

17.25

Market Value

Spread (bps):

85.61

Market Value

Payment Frequency
(x/year):
Recovery:

BBB Corp YTM Index

Value

4
40%

-0.13%
Tenor (years):

In contract
From KMV Model
In contract

Current Yield Spread over Treasury at Issuance

Preferred Current Yield to REG bond YTM Spread

Jonathan Smith

REAL1-GC 1095 Capital Markets

MARKET PRICING ANALYSIS

Retail REIT Peer Group Current Bond Yield

Regency Debt and Preferred Equity: Cumulative Bond Default

Analysis

REAL1-GC 1095 Capital Markets

Regency Company Quantitative Bond Default Analysis

Regency Centers Corp is a Retail REIT that operates, develops, and

invests in shopping center product types on the US National level.
Despite the recent severe correction in the US economy, Regency stands
to be well positioned with respect to its secured and unsecured debt
obligations. All current issues of senior unsecured debt obligations have
industry standard debt covenants that Regency has done well to be more
than respectful of.
As of year end 2012, Regency reported 50% total debt to total assets;
approximately 75% of debt covenant allowance. Additionally, secured
debt of partnerships and JVs is only 10% of total assets. Furthermore,
Regency maintains a high percentage of unencumbered assets with a
reported 76% of wholly-owned real estate assets unencumbered.
Moreover, the company, along with pro-rata share of partnerships
recorded a 2.5 coverage ratio up from 2.3 in 2011.
Regencys Credit Ratings are consistent with REIT sector companies.
Moodys and Fitch credit rating companies boast Regencys high level of
liquidity and good FFO payout.
Under current economic conditions, the quality of Regencys balance
sheet provides adequate protection to unsecured bond holders. With
over $5.4 billion in first loss position over the analyzed debt issuance, it is
highly unlikely that recovery of the initial investment would ever come to
fruition.
The greatest risk to Regency margins is the sizable maturities coming due
in the next four years, the uncertainty related to asset and consumer
inflation in the economy, and the risk associated with future consumer
fundamentals.

Upon analysis of the 2007 bond issuance, current yield spread over the
10 year Treasury with the same maturity was 1.25% . While comparing
this spread against current competitors, Regencys spread over Treasury
was approximately equal on average at 0.02%.
Yield to maturity for Regencys bond was 2.27% with a YTM spread of
1.56% over Treasury. When compared against competitors, Regencys
yield to maturity was -0.72% less on average. Furthermore, comparing
Regencys yield to maturity to the Thompson Reuters BBB 4 Year
Corporate Bond YTM Index, Regencys Issuance was -0.13% less than the
index.
Based on these spreads and the comparable yields of sector competitors
and similar corporate debt, the market appears to be pricing Regencys
bond issuance on par or slightly less risky than the market for similar
debt. When comparing Regencys current yield spread upon original
debt offering in June of 2007 against the current spread in March 2013,
the market appears to be pricing the debt equal or slightly less risky at 0.03%.
In order to determine what portion of the current market pricing is a
result of default risk associated with Regencys creditworthiness or a
premium for liquidity risk, default risk simulations were performed. The
first simulation was a Structural Model built to simulate technical default
of debt covenants due to fluctuations in market capitalization. The
results of the simulation determined that the risk of technical default of
Regencys debt covenants was no more than .75% on an annual basis.
Furthermore, the CDS risk simulation based on Regencys 4 year credit
default swap spreads indicated an annual risk premium of 1.46% and a
cumulative risk premium of 5.85%. While an additional reduced form
model based on the bond tenure of all outstanding unsecured senior
debt calculated an annual individual bond risk premium of 1.5% and a
cumulative risk premium of 4.06%.
Based on Regencys technical default risk of 0.75% determined by the
structural model, there appears to be a liquidity premium of between
0.75% and 0.50% as determined by the reduced form models and the
current yield spread.
In conclusion, given the investors strategy to hold the bonds to maturity,
the current market spreads, and the risk model results, the investor
should not accept a yield to maturity on Regencys bonds less than
3.49%, thereby paying no more than 109.4041 for this bond issuance.

100%
Common Equity

80%

Subsid Pfd Partnership Interest

60%

REG Senior 10.5

40%

REG Senior 10

20%

Bond Issuance

0%

REG Senior 05

Regency Centers Corporation

Capital Structure
Jonathan Smith

REG Senior 04
Credit Facility

REAL1-GC 1095 Capital Markets

CUMULATIVE BOND DEFAULT ANALYSIS

Regency Company Internal Default Probability Analysis

Regency Debt and Preferred Equity: Treasury Spread & Yield

Analysis

REAL1-GC 1095 Capital Markets

100

Jonathan Smith

100
6%
100
100
100
6/15/2017
3.49% 6/15/2017
6/15/2017
6/15/2017
5.88%
2.27%
5.54%
2.92%
6%
2.70%
5.40%
3.34%
5.875
2.9375
5.542
2.771
6
3
5.4
2.7
REGENCY CENTERS
FEDERAL REALTY
LP. 2007 5 7/8%
IT. 2006 5.4%
WEINGARTEN REAL. EQUITY ONE INCO.
15/06/17 S 2006 5.542% 15/12/16 2006 6% 15/09/16 S 01/12/13 S MARKET PRICE S-A - DEFAULT PRICE DEFAULT PRICE
DEFAULT PRICE
Market Curnt Yld
Market
Curnt Yld Market Curnt Yld Market Curnt Yld
99.207
5.92%
97.1551
5.70% 98.9169
6.07% 97.1523
5.56%
99.3532
5.91%
97.3004
5.70% 99.0607
6.06% 97.2866
5.55%
99.0571
5.93%
97.0194
5.71% 98.7847
6.07% 97.0269
5.57%
99.0578
5.93%
97.023
5.71%
98.787
6.07% 97.1091
5.56%
97.9562
6.00%
96.1138
5.77% 97.8938
6.13% 96.4876
5.60%
97.8114
6.01%
95.9766
5.77%
97.759
6.14% 96.4646
5.60%
115.3403
5.09%
110.62
5.01%
113.32
5.29%
103.67
5.21%
115.3017
5.10%
110.59
5.01%
113.29
5.30%
103.67
5.21%
114.8971
5.11%
110.39
5.02%
113.1
5.31%
103.66
5.21%
114.7634
5.12%
110.31
5.02%
113.02
5.31%
103.64
5.21%
114.8602
5.11%
110.36
5.02%
113.07
5.31%
103.69
5.21%
114.8475
5.12%
110.38
5.02%
113.08
5.31%
103.66
5.21%
114.8372
5.12%
110.5
5.02%
113.18
5.30%
103.61
5.21%
114.8274
5.12%
110.51
5.01%
113.19
5.30%
103.56
5.21%
114.9646
5.11%
110.56
5.01%
113.24
5.30%
103.59
5.21%
114.8234
5.12%
110.49
5.02%
113.17
5.30%
103.54
5.22%
114.9268
5.11%
110.58
5.01%
113.25
5.30%
103.51
5.22%
114.976
5.11%
110.45
5.02%
113.38
5.29%
103.5
5.22%
114.8179
5.12%
110.42
5.02%
113.35
5.29%
103.49
5.22%
114.9879
5.11%
110.37
5.02%
113.3
5.30%
103.48
5.22%
114.7876
5.12%
110.32
5.02%
113.25
5.30%
103.43
5.22%
114.6196
5.13%
110.23
5.03%
113.15
5.30%
103.39
5.22%
114.8447
5.12%
110.29
5.02%
113.2
5.30%
103.42
5.22%
114.7908
5.12%
110.28
5.03%
113.19
5.30%
103.37
5.22%
114.7908
5.12%
110.28
5.03%
113.19
5.30%
103.37
5.22%
114.7229
5.12%
110.42
5.02%
113.25
5.30%
103.4
5.22%
114.7982
5.12%
110.42
5.02%
113.24
5.30%
103.37
5.22%
114.935
5.11%
110.49
5.02%
113.31
5.30%
103.36
5.22%
114.9546
5.11%
110.49
5.02%
113.3
5.30%
103.35
5.22%
115.1487
5.10%
110.64
5.01%
113.44
5.29%
103.34
5.23%
115.1651
5.10%
110.62
5.01%
113.42
5.29%
103.34
5.23%
115.1369
5.10%
110.62
5.01%
113.41
5.29%
103.35
5.22%
115.23
5.10%
110.67
5.01%
113.45
5.29%
103.3
5.23%
115.264
5.10%
110.69
5.01%
113.46
5.29%
103.25
5.23%
115.2405
5.10%
110.68
5.01%
113.45
5.29%
103.25
5.23%
115.1727
5.10%
110.61
5.01%
113.38
5.29%
103.28
5.23%
114.9548
5.11%
110.58
5.01%
113.34
5.29%
103.25
5.23%
114.8293
5.12%
110.53
5.01%
113.29
5.30%
103.24
5.23%
114.6444
5.12%
110.43
5.02%
113.2
5.30%
108.11
4.99%
114.635
5.12%
110.48
5.02%
113.25
5.30%
103.26
5.23%
REG
REG
REG
REG
REG
REG
REG
REG
REG
REG
REG

Current Yield Spread over Treasury:

YTM Spread over US Treasury:
Current Yield Spread over WeinGarten:
Current Yield Spread over Equity One:
Current Yield Spread over Federal Realty:
Average Current Yield of Competitors:
YTM Spreaad over BBB Corp:
YTM Spread over WeinGarten:
YTM Spread over Equity One:
YTM Spread over Federal Realty:
Average YTM of Competitors:

REG
REG
REG
REG

Current Bond Price

Current YTM
Required Bond Price
Required YTM

103.23 <---Actual
<---Adjusted for remaining years

1.23%
1.56%
0.11%
-0.18%
0.13%
0.02%
-0.13%
-0.66%
-0.44%
-1.08%
-0.72%
114.6444
2.27%
109.4041
3.49%

REAL1-GC 1095 Capital Markets

TREASURY SPREAD AND YIELD ANALYSIS

6/1/2007
6/4/2007
6/5/2007
6/6/2007
6/7/2007
6/8/2007
1/23/2013
1/24/2013
1/25/2013
1/28/2013
1/29/2013
1/30/2013
1/31/2013
2/1/2013
2/4/2013
2/5/2013
2/6/2013
2/7/2013
2/8/2013
2/11/2013
2/12/2013
2/13/2013
2/14/2013
2/15/2013
2/18/2013
2/19/2013
2/20/2013
2/21/2013
2/22/2013
2/25/2013
2/26/2013
2/27/2013
2/28/2013
3/1/2013
3/4/2013
3/5/2013
3/6/2013
3/7/2013
3/8/2013
3/11/2013

TR US CORP BMK
BBB 4Y YIELD(U$) RED. YIELD
Market
YTM
5.877
5.898
5.938
5.961
5.982
6.017
2.385
2.425
2.404
2.44
2.436
2.475
2.469
2.483
2.468
2.472
2.476
2.466
2.468
2.466
2.492
2.512
2.449
2.424
2.433
2.433
2.413
2.391
2.406
2.399
2.367
2.344
2.328
2.334
2.314
2.342
2.335
2.363
2.40%
2.396
2.389

100
5/15/2017
4.50%
0.70%
$4.50
$2.25
US TREASURY 2007
BOFA ML US CORP 4 1/2% 15/05/17 CBBB 3-5Y - TOT
2017 - MARKET
RETURN IND
PRICE
Market Curnt Yld Market Curnt Yld
378.21
96.4688
4.66%
378.688
96.6719
4.65%
378.028
96.3125
4.67%
378.427
96.3594
4.67%
376.955
95.3906
4.72%
376.848
95.2344
4.73%
583.1
116.5156
3.86%
583.046
116.4688
3.86%
582.06
116.0781
3.88%
581.791
115.9688
3.88%
581.867
115.9688
3.88%
581.705
115.9688
3.88%
581.705
116
3.88%
581.736
116
3.88%
582.149
116.125
3.88%
581.665
116
3.88%
582.277
116.1406
3.87%
582.51
116.1719
3.87%
582.518
116.125
3.88%
582.595
116.0781
3.88%
582.26
115.9375
3.88%
581.822
115.8125
3.89%
582.576
115.9688
3.88%
582.549
115.9063
3.88%
582.763
115.9063
3.88%
582.64
115.8281
3.89%
582.952
115.8594
3.88%
583.452
115.9844
3.88%
583.741
115.9688
3.88%
584.81
116.1719
3.87%
584.85
116.2188
3.87%
584.852
116.2031
3.87%
585.436
116.2344
3.87%
585.74
116.2813
3.87%
585.59
116.2188
3.87%
585.669
116.1406
3.87%
585.242
116
3.88%
584.715
115.8281
3.89%
584.28
115.6406
3.89%
584.565
115.625
3.89%

Regency Debt and Preferred Equity: Probability of Default from CDS

Spreads Simulation

REAL1-GC 1095 Capital Markets

10

Inputs: CDS Market Data

Variable
Value
Common Calculation Method
Par (Dollars)
$1,300,000.00 Market Value
Upfront Payment (bps):
17.25
Market Value
Spread (bps):
85.61
Market Value
Payment Frequency (x/year):
4
In contract, generally quarterly
Recovery:
40%
Assumption
Tenor (years):
4
In contract

Periodic PD
Cumulative Probability of Default
Annual Default Probability

Fixed Leg
Month
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48

Risk Free Rate

0.09
0.10
0.10
0.10
0.10
0.10
0.11
0.11
0.12
0.13
0.14
0.15
0.15
0.16
0.17
0.18
0.19
0.20
0.21
0.22
0.23
0.24
0.25
0.26
0.27
0.28
0.30
0.31
0.32
0.33
0.34
0.36
0.37
0.39
0.40
0.41
0.42
0.44
0.46
0.48
0.50
0.52
0.54
0.56
0.58
0.60
0.62
0.64
0.66

Jonathan Smith

Discount Factor
1.000
0.993
0.985
0.978
0.970
0.962
0.955
0.946
0.938
0.929
0.920
0.910
0.899
0.889
0.878
0.867
0.855
0.842
0.830
0.817
0.803
0.789
0.775
0.761
0.747
0.732
0.717
0.702
0.686
0.670
0.654
0.639
0.623
0.606
0.590
0.574
0.558
0.541
0.525
0.509
0.493
0.476
0.460
0.444
0.427
0.412
0.396
0.380
0.365

Fixed Leg Payment

2,242.50
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33
2,782.33

0.12%
5.85%
1.46%

Value- No Credit Event (numerator)

33,566
Fixed Leg PV
2,242.50
2,719.91
2,655.87
2,585.54
2,502.24
2,411.11
2,308.51
2,196.57
2,077.40
1,951.82
1,820.95
1,687.27
1,551.15
1,416.02
1,279.54
1,144.93
1,014.86

REAL1-GC 1095 Capital Markets

Periodic PD
Cumulative Probability of Default
Annual Default Probability

0.12%
5.85%
1.46%

Contingent Leg (Assumes Constant Default Probability)

Contingent Leg Payment
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000
780000

PV of Contingent Leg

Value- Credit Event (denominator)

25,911,878
Net PV of Contingent Leg

774418.5154
768583.7852
762503.4754
756471.2673
750486.7803
744549.637
738102.6105
731711.4085
724833.6125
717488.7914
709697.1316
701479.3592
693356.7426
684833.8904
675932.1271
666673.0844
657078.6279
647170.7859
636971.6795
626503.4559
615788.2225
604847.9847
593704.5859
582379.6505
570894.5294
559270.2491
547175.241
535000.059
522764.3971
510487.4059
498187.6597
485584.397
473011.1113
460207.2357
447482.5522
434851.7081
422328.5924
409688.3464
396969.8647
384210.3528
371445.235
358708.0798
346030.5415
333442.3176
320971.1207
308642.6648
296480.6646
284506.8462

772,176.02
766,341.29
760,260.98
751,508.85
745,524.37
739,587.22
730,484.33
724,093.12
717,215.33
707,284.97
699,493.31
691,275.53
680,650.68
672,127.83
663,226.07
651,555.92
641,961.46
632,053.62
619,546.00
609,077.78
598,362.54
585,225.74
574,082.34
562,757.40
549,194.89
537,570.60
525,475.60
511,348.60
499,112.93
486,835.94
472,715.24
460,111.98
447,538.70
433,047.55
420,322.87
407,692.02
393,617.76
380,977.51
368,259.03
354,083.49
341,318.37
328,581.22
314,624.14
302,035.91
289,564.72
276,091.33
263,929.33
251,955.51

11

PROBABILITY OF DEFAULT FROM CDS SPREADS SIMULATION

Probability of Default from CDS Spreads

Regency Debt and Preferred Equity: Merton Risk Model

REAL1-GC 1095 Capital Markets

12

Date
9/30/2006
9/30/2007
12/31/2007
3/31/2008
6/30/2008
9/30/2008
12/31/2008
3/31/2009
6/30/2009
9/30/2009
12/31/2009
3/31/2010
6/30/2010
9/30/2010
12/31/2010
3/31/2011
6/30/2011
9/30/2011
12/31/2011
3/31/2012
6/30/2012
9/30/2012
12/31/2012
3/31/2013

ST Liabilities
23,672,000
23,672,000
23,672,000
62,909,000
62,909,000
62,909,000
62,909,000
173,970,000
173,970,000
173,970,000
173,970,000
194,313,000
194,313,000
194,313,000
194,313,000
199,375,000
199,375,000
199,375,000
199,375,000
241,910,000
241,910,000
241,910,000
241,910,000
241,910,000

LT Liabilities
1,984,303,000
1,984,303,000
1,984,303,000
2,072,662,000
2,072,662,000
2,072,662,000
2,072,662,000
1,712,410,000
1,712,410,000
1,712,410,000
1,712,410,000
1,900,156,000
1,900,156,000
1,900,156,000
1,900,156,000
1,783,065,000
1,783,065,000
1,783,065,000
1,783,065,000
1,917,700,000
1,917,700,000
1,917,700,000
1,917,700,000
1,917,700,000

Trading Days

1623

Stock Price
78.17
78.17
78.17
78.64
78.51
77.28
76.25
77.75
78.92
79.56
79.95
79.95
81.52
81.93
81.18
81.82
81.32
81.83
83.06
84.63
85.04
85.46
86.3
87.1
88.45
88.57
88.51
89.82
92.79
91.63
90.73
88.34
89.54
88.01
88.52
88.25
88.25
89.01
88.75
88.63
87.18
87.02
84.05
85.74

Risk Free Rate (annualized)

5.00%
5.00%
5.00%
4.98%
4.95%
4.98%
5.01%
5.02%
5.02%
5.05%
5.06%
5.06%
5.06%
5.08%
5.07%
5.09%
5.09%
5.10%
5.09%
5.11%
5.12%
5.12%
5.11%
5.09%
5.09%
5.08%
5.08%
5.07%
5.06%
5.06%
5.08%
5.10%
5.10%
5.06%
5.04%
5.05%
5.05%
5.04%
5.05%
5.07%
5.05%
5.05%
4.93%
4.96%

Benchmark (only for CAPM Drift)

12,729,100
12,729,100
12,729,100
12,711,850
12,734,820
12,657,300
12,685,460
12,678,910
12,709,320
12,790,470
12,852,530
12,852,530
12,863,040
12,851,500
12,813,320
12,850,470
12,782,660
12,827,880
12,936,960
12,791,180
12,775,720
12,761,690
12,835,330
12,919,990
12,984,280
13,011,380
12,998,780
13,007,850
13,025,990
13,010,630
12,918,590
12,863,280
12,961,010
13,060,070
13,075,340
13,063,900
13,063,900
13,101,120
13,082,660
13,072,100
13,025,540
13,009,220
12,557,440
12,627,250

Market Info
Date
12/29/2006
1/1/2007
1/2/2007
1/3/2007
1/4/2007
1/5/2007
1/8/2007
1/9/2007
1/10/2007
1/11/2007
1/12/2007
1/15/2007
1/16/2007
1/17/2007
1/18/2007
1/19/2007
1/22/2007
1/23/2007
1/24/2007
1/25/2007
1/26/2007
1/29/2007
1/30/2007
1/31/2007
2/1/2007
2/2/2007
2/5/2007
2/6/2007
2/7/2007
2/8/2007
2/9/2007
2/12/2007
2/13/2007
2/14/2007
2/15/2007
2/16/2007
2/19/2007
2/20/2007
2/21/2007
2/22/2007
2/23/2007
2/26/2007
2/27/2007
2/28/2007

Jonathan Smith

Shares Outstanding
69,614,538
69,614,538
69,614,538
70,002,161
70,002,161
70,002,161
70,002,161
80,315,597
80,315,597
80,315,597
80,315,597
81,888,361
81,888,361
81,888,361
81,888,361
89,914,839
89,914,839
89,914,839
89,914,839
90,388,236
90,388,236
90,388,236
90,388,236
90,388,236

Stock
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538
69,614,538

MV of Equity
5,441,768,435
5,441,768,435
5,441,768,435
5,474,487,268
5,465,437,378
5,379,811,497
5,308,108,523
5,412,530,330
5,493,979,339
5,538,532,643
5,565,682,313
5,565,682,313
5,674,977,138
5,703,519,098
5,651,308,195
5,695,861,499
5,661,054,230
5,696,557,645
5,782,183,526
5,891,478,351
5,920,020,312
5,949,258,417
6,007,734,629
6,063,426,260
6,157,405,886
6,165,759,631
6,161,582,758
6,252,777,803
6,459,532,981
6,378,780,117
6,316,127,033
6,149,748,287
6,233,285,733
6,126,775,489
6,162,278,904
6,143,482,979
6,143,482,979
6,196,390,027
6,178,290,248
6,169,936,503
6,068,995,423
6,057,857,097
5,851,101,919
5,968,750,488

% ST Liabilities in Barrier
% LT Liabilities in Barrier
Costs at Default + Impaired Assets

100%
189%
$119,816,000

Drift
Zero
Annual Risk Free Rate
Historical Annual Asset Return
CAPM Returns (5% mrkt premium)

Zero
0.00%
0.15%
94.06%
3.01%

Est. Book Liabilities

2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000
2,007,975,000

Est Default Barrier

3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155
3,764,083,155

Iterate to
Solve for
Asset Values

Nave Asset Value Guess

7,449,743,435
7,449,743,435
7,449,743,435
7,482,462,268
7,473,412,378
7,387,786,497
7,316,083,523
7,420,505,330
7,501,954,339
7,546,507,643
7,573,657,313
7,573,657,313
7,682,952,138
7,711,494,098
7,659,283,195
7,703,836,499
7,669,029,230
7,704,532,645
7,790,158,526
7,899,453,351
7,927,995,312
7,957,233,417
8,015,709,629
8,071,401,260
8,165,380,886
8,173,734,631
8,169,557,758
8,260,752,803
8,467,507,981
8,386,755,117
8,324,102,033
8,157,723,287
8,241,260,733
8,134,750,489
8,170,253,904
8,151,457,979
8,151,457,979
8,204,365,027
8,186,265,248
8,177,911,503
8,076,970,423
8,065,832,097
7,859,076,919
7,976,725,488

REAL1-GC 1095 Capital Markets

Results
Firm Asset Vol
Firm Asset Value
Firm Liability Value
Sum of Squared Errors
Asset Drift (Annual)
Barrier
Distance to Default
1-year Default Probability
Current Liabilities
Estimated Recovery

step i-1
7,360,709,514
7,360,709,514
7,360,709,514
7,393,403,015
7,385,065,105
7,300,010,004
7,228,800,224
7,331,467,905
7,411,857,868
7,455,288,591
7,481,935,671
7,481,935,671
7,590,119,752
7,618,006,643
7,566,479,475
7,610,221,505
7,575,737,927
7,610,714,763
7,695,808,906
7,803,908,032
7,832,065,635
7,861,118,147
7,919,441,159
7,975,217,049
8,068,736,317
8,077,246,112
8,073,088,132
8,164,090,094
8,370,334,829
8,289,831,151
8,227,006,697
8,060,919,887
8,144,095,406
8,038,831,222
8,074,557,069
8,055,653,768
8,055,653,768
8,108,516,917
8,090,302,487
8,081,598,133
7,981,534,614
7,970,454,991
7,767,335,880
7,883,610,207

21.18%
6,939,394,604
2,159,610,000
2.74E+19
0.00%
3,856,774,500
2.667659986
0.75%
$2,159,610,000
173%

21.18%
ln(return)
0.000000
0.000000
0.004432
-0.001128
-0.011584
-0.009803
0.014103
0.010905
0.005843
0.003568
0.000000
0.014356
0.003667
-0.006787
0.005764
-0.004542
0.004606
0.011119
0.013949
0.003602
0.003703
0.007392
0.007018
0.011658
0.001054
-0.000515
0.011209
0.024949
-0.009664
-0.007607
-0.020395
0.010265
-0.013009
0.004434
-0.002344
0.000000
0.006541
-0.002249
-0.001076
-0.012459
-0.001389
-0.025814
0.014859

57.1398%
step i
7,353,038,751.60
7,353,038,751.60
7,353,038,751.60
7,386,057,546.62
7,377,608,424.65
7,291,645,727.15
7,219,601,848.17
7,323,496,523.65
7,404,731,841.58
7,448,606,375.17
7,475,506,567.45
7,475,506,567.45
7,584,602,029.78
7,612,715,659.78
7,560,780,424.11
7,604,877,970.29
7,570,126,336.27
7,605,381,278.99
7,691,078,972.32
7,799,867,174.87
7,828,190,136.06
7,857,401,738.09
7,916,021,115.79
7,972,054,850.48
8,065,976,549.29
8,074,516,911.71
8,070,342,323.71
8,161,683,216.04
8,368,555,375.22
8,287,827,456.32
8,224,814,851.00
8,058,132,033.68
8,141,626,616.70
8,035,937,467.72
8,071,803,099.53
8,052,826,466.84
8,052,826,466.84
8,105,896,107.50
8,087,614,496.85
8,078,882,739.00
7,978,385,477.20
7,967,254,803.98
7,762,982,822.54
7,879,940,633.52

13

market returns
0.0000%
0.0000%
-0.1356%
0.1805%
-0.6106%
0.2222%
-0.0516%
0.2396%
0.6365%
0.4840%
0.0000%
0.0817%
-0.0898%
-0.2975%
0.2895%
-0.5291%
0.3531%
0.8467%
-1.1332%
-0.1209%
-0.1099%
0.5754%
0.6574%
0.4964%
0.2085%
-0.0969%
0.0698%
0.1394%
-0.1180%
-0.7099%
-0.4291%
0.7569%
0.7614%
0.1169%
-0.0875%
0.0000%
0.2845%
-0.1410%
-0.0808%
-0.3568%
-0.1254%
-3.5345%
0.5544%

REGENCY DEBT AND PREFERRED EQUITY: MERTON RISK MODEL

'Merton' Model - Historical Data for Calculations

Balance Sheet Information

Regency Debt and Preferred Equity: Probability of Default from

Bond Term Structure Simulation

REAL1-GC 1095 Capital Markets

14

Bond
1
2
3
4
5

Maturity Date
4/15/2014
8/1/2015
6/15/2017
6/15/2020
4/15/2021

Price (out of $100)

$104.04
$108.96
$114.64
$115.71
$110.71

Inputs: Other
Bond Coupon Frequency (x/yr)
Recovery Rate
Settlement Date
Inputs: Term Risk Free Bonds
Tenor (Years)
0.083333333
0.25
0.5
2
3
5
10

Coupon
4.950%
5.250%
5.875%
6.000%
4.800%

2
40%
8-Mar-13

Dates
8-Apr-13
8-Jun-13
8-Sep-13
8-Mar-15
8-Mar-16
8-Mar-18
8-Mar-23

90%

70%

50%

survival probability

Jonathan Smith

Rates
0.08%
0.07%
0.11%
0.24%
0.37%
0.79%
1.92%

Yield
1.252%
1.432%
2.257%
3.531%
3.284%

Default
Price of
Prob
Interp RfR RfR Bond Monthly
0.162%
105.27
0.143%
0.292%
111.84
0.213%
0.637%
122.03
0.338%
1.304%
132.47
0.443%
1.492%
125.16
-0.549%

Date

Next
Ma turi ng
Bond

8-Mar-13
8-Apr-13
8-May-13
8-Jun-13
8-Jul-13
8-Aug-13
8-Sep-13
8-Oct-13
8-Nov-13
8-Dec-13
8-Jan-14
8-Feb-14
8-Mar-14
8-Apr-14
8-May-14
8-Jun-14
8-Jul-14
8-Aug-14
8-Sep-14
8-Oct-14
8-Nov-14
8-Dec-14
8-Jan-15
8-Feb-15
8-Mar-15
8-Apr-15
8-May-15
8-Jun-15
8-Jul-15
8-Aug-15
8-Sep-15
8-Oct-15
8-Nov-15
8-Dec-15
8-Jan-16

1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
3
3
3
3
3

PV Recovery Defa ul t PV Recovery Defa ul t PV Recovery Defa ul t PV Recovery Defa ul t PV Recovery Defa ul t
s urvi va l
Bond 1
Proba bi l i ty
Bond 2
Proba bi l i ty
Bond 3
Proba bi l i ty
Bond 4
Proba bi l i ty
Bond 5
Proba bi l i ty proba bi l i ty

40.00
42.47
42.47
42.46
42.46
42.45
42.45
44.91
44.91
44.90
44.89
44.89
44.88
44.87

0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%

40.00
39.99
39.99
39.99
42.61
42.60
42.60
42.59
42.58
42.58
45.19
45.18
45.18
45.17
45.16
45.15
47.76
47.75
47.73
47.72
47.71
47.70
50.30
50.29
50.27
50.25
50.23
50.21
50.19

REAL1-GC 1095 Capital Markets

0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%

40.00
39.99
39.99
42.93
42.92
42.91
42.91
42.90
42.90
45.83
45.82
45.81
45.80
45.79
45.78
48.71
48.70
48.68
48.67
48.66
48.65
51.56
51.55
51.54
51.52
51.50
51.48
54.38
54.36
54.34
54.32
54.30
54.28
57.17

0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.34%
0.34%
0.34%
0.34%
0.34%

40.00
39.99
39.99
42.99
42.98
42.98
42.97
42.97
42.96
45.95
45.94
45.94
45.93
45.92
45.91
48.89
48.88
48.87
48.86
48.85
48.84
51.81
51.80
51.79
51.77
51.75
51.73
54.70
54.68
54.66
54.63
54.61
54.59
57.54

0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.34%
0.34%
0.34%
0.34%
0.34%

40.00
42.39
42.39
42.39
42.38
42.38
42.37
44.76
44.76
44.75
44.74
44.74
44.73
47.12
47.11
47.10
47.09
47.08
47.06
49.45
49.43
49.42
49.41
49.39
49.38
51.75
51.73
51.71
51.69
51.67
51.65
54.01
53.98
53.96

15

0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.14%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.21%
0.34%
0.34%
0.34%
0.34%
0.34%

100%
100%
100%
100%
99%
99%
99%
99%
99%
99%
99%
98%
98%
98%
98%
98%
98%
97%
97%
97%
97%
97%
96%
96%
96%
96%
95%
95%
95%
95%
94%
94%
94%
93%
93%

PROBABILITY OF DEFAULT FROM BOND TERM STRUCTURE SIMULATION

Probability of Default from Bond Term Structure