EFTA01891798

To: Barrett. Paul S From: Jeffrey Epstein Sent: Mon 10/22/2012 1:51:15 PM Subject: Re: To Do - HY BOND IDEAs: EarthLink and Headwaters ok On Mon, Oct 22, 2012 at 9:36 AM, Barrett, Paul S wrote: Jeffrey I think we should buy $1MM each of the following bonds: 1. EarthLink 8.875% 2019 ytw 7.94% 2. Headwaters 7.625% 2019 ytw 6.70% - fits into our housing recovery theme We have $18MM in cash right now. Let me know. Paul ELNK 8.875 05/15/19 Issuer: EARTHLINK INC Ticker: ELNK Ratings: B2/8- Ranking: Senior Unsecured Coupon: 8.875% EFTA_R1_00312353 EFTA01891798 Maturity: Call Schedule: 05/15/19 05/15/15 @ $104.438 05/15/16 @ $102.219 05/15/17 @ $100 Price: $103.50 YTW: 7.94% (05/15/17 @ 100.00) YTM: 8.17% (UST + 702bps) OAS Mod Duration: 3.82 Issue Size: 300mm Min Denom: 2kx 1k Cusip: 270321AC6 Company Background EarthLink, Inc. provides IT, network and communication services to individual and business consumers. The Company provides customers with managed IT services including cloud computing, data centers, virtualization, security ,applications and support services. EarthLink also offers nationwide data and voice IP services. Key Points - Strong credit metrics o 2.2x Gross leverage / 1.3x net leverage • Peers are 3-4x levered o 400mm in liquidity (260mm of which is in cash) o Good free cash flow • LTM FCF of 81mm - Relative Value o WIN 7 3/15/19 ( 97381WAF1 )- YTW(2015): 5.1% - pick up 284bps o CBB 8.375 10/15/20 ( 171871AN6 ) - YTW(2015): 6.5% - pick up 144bps EFTA_R1_003 12354 EFTA01891799 o JPM Single B High Yield Index: 6.31% - pick up 163bps o JPM Telecommunications High Yield Index: 5.68% - pick up 226bps Good debt covenants o EarthLink cannot raise debt if leverage exceeds 3.75x - Declining consumer side (specifically dial-up) is being addressed through pursuits of full IT solutions on the business side o This may cause higher leverage in the future but as mentioned above there is a limitation to leverage right now based on covenants Key catalyst for upside on these bonds: Refinancing of 10.5 ITC Deltacom notes o ITC Deltacom subsidiary represents —31% of consolidated EBITDA and 36% of total assets o Right now, they cannot guarantee the 8.875 senior notes until its existing secured debt (ELNK 10.5 16) is refinanced o DB expects the call to happen in April 2013 as it seems they could refinance significantly cheaper Risks: Greater than expected decline in EBITDA from One Communications or the dial-up business, as well as integration risk associated from future M&A deals we believe the company may be pursuing. Source: www.earthlink.net DB Research HW 7.625 04/01/2019 Issuer: HEADWATERS INC Ticker: HW Ratings: B2/B+ Ranking: r i lien Coupon: 7.625 Maturity: 04/01/2019 EFTA_R1_00312355 EFTA01891800 Call Schedule: 04/01/2015 @ $103.813 04/01/2016 @ $101.906 04/01/2017 @ $100.000 Price: $103.50 VTW: 6.70 % (04/01/2017 @ 100.00) YTM: 6.94% (UST + 583bps) OAS Mod Duration: 3.86 Issue Size: 400mm Min Denom: 2kxlk Cusip: 42210PAQ5 Company Background Headwaters Incorporated is a manufacturer of building products for new residential, residential remodeling, and commercial construction. Headwaters' portfolio of light building products includes architectural stone; resin-based exterior siding accessories, such as shutters, mounting blocks and gable vents; concrete block and brick; and other building products. Key Points - Three business segments: Light building Products (- 51% of revenues), Heavy Construction Materials (47% of revenues), and Energy Technology (2% of revenues) o % revenue based on Last Twelve Months - Good credit metrics o 3.9x Leverage through these notes o 80mm in liquidity of which 30mm is cash o DB estimates 30mm FCF next year o Only other debt they have are subordinate convertible bonds • - 54mm due in 2014 and - 49mm due in 2016 - Good play on our housing recovery theme EFTA_R1_00312356 EFTA01891801 - Relative value o JPM Single B High Yield Index: 6.31% - pick up 39bps o JPM Housing High Yield Index: 5.63%— pick up 107bps Risks: Declines in new residential and nonresidential construction spending. Also, raw material price changes and the ability to pass those along could affect earnings. Finally an adverse ruling by the EPA classifying coal ash as a hazardous waste could result in concrete makers choosing to use less or no coal ash in their ready-mixed concrete, which would adversely affect HW's heavy construction materials segment. Source: www headwaters.corn, DB Research Paul Barrett, CFA Managing Director Global Investment Opportunities Group JPMorgan Private Bank This email is confidential and subject to important disclaimer( and conditions includinlr on offer% for the purchase or sale of seernities, acentric> and completeness of information. viruses. confidentiality. legal ensliege. and leral entity disclaimers. a•ailahle at www.leinorean cane napes discloraires ■itititititititttitititititi■itiiitttititititititititititi■ The information contained in this communication is confidential, may be attorney-client privileged, may EFTA_R1_00312357 EFTA01891802 constitute inside information, and is intended only for the use of the addressee. It is the property of Jeffrey Epstein Unauthorized use, disclosure or copying of this communication or any part thereof is strictly prohibited and may be unlawful. If you have received this communication in error, please notify us immediately by return e-mail or by e-mail to [email protected], and destroy this communication and all copies thereof, including all attachments. copyright -all rights reserved EFTA_R1_00312358 EFTA01891803