EFTA02029821

J.P. Morgan U.S. High Yield Credit Analyst Focus List 2Q13 This is our twenty-third quarterly Analyst Focus List (AFL) highlighting ow sector analysts' best ideas. Starting with this issue, we are publishing the high yield portion of our AFL as a standalone report. Investors have complained for a long time that the high yield market has felt picked over. While find flows have favored loans YTD, and our index briefly backed up to about 6% in February, investors wonder whether to call today's Index yield of 5.7% "high yield." Still, everything is relative. Inside this report you'll fund 20 long ideas and 4 shorts that we think have the potential to outperform in the next three months. These ideas are the product of extensive bottoms-up analysis and our analysts are, as always, available to talk through their assumptions and rationales. This quarterly roundup is a complete refresh; ideas not carried over and presented again are considered superseded by new ideas. Names may be removed intra-quarter where a valuation target has been largely or wholly achieved or the original rationale is considered no longer valid. New ideas can also be added intra-quarter. For intraquarter additions or deletions, analysts will post a brief summary of their rationale to our J.P. Morgan Markets website. Please check J.P. Morgan Markets for the most up-to- date AFL at any time. We hope you find this report helpful in meeting your investment objectives. North America Credit Research 09 Aphl 2013 U.S. High Yield Credit Research David Common, CFA AC (1-212)270.5260 dmad common@ipmorgan corn .1P Morgan Secunthm LLC See page 22 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com E FTA_R 1_00539015 EFTA02029821 David Common. CM t1.212)270.5260 david.common@)pmorgan.com High Yield Focus List Sorted by Sector Sector Ticker Company Name Recommendation Analyst Name Page Mines AMR AMR Corp. Buy AMR 7.0% STranche 114 EETCs Mark Streeter 3 Automotive DAN Dana Holding Corp. Buy DAN 6.75% Sr. Notes due 2021 Eric Selle 4 Automotive ITIATIM Jaguar Land Rover Sell TTMTIN 5.625% Sr. Notes due 2023 Eric Seale 5 Cable,SatelIte WOWFINFIN WideOpenWest Buy WOWFINFIN 13 318s '19 g $113.75.9.95% Mil Michael Pace 6 Chemicals MOMENT Idornentive Performance Materials Buy MOMENT 9.0% 2nd Lien Notes due 2021 Tarn Hamid 7 Chemicals TROX Tronox Sell TROX 6.375% Senor Unsecured Notes due 2020 Tare Hamod 8 Energy EDG Edgen Murray Corp. Buy EDG 8.75% Sr. Secured Notes due 2020 Gregg Brody 9 Gaming TRIBAL Mohegan Gaining Authority Buy TRIBAL 3rd bens due '12/16 Susan Berliner 10 Healthcare KCI Kinetic Concepts Inc. Buy KCI 10.500% 2nd lien Notes due 2018 David Common 11 Homebuilding HOV Hovnanian Enterprises Buy HOV 9.125% 2nd Lien Notes due 11/20 Susan Berliner 12 Industrials MTW Manitowoc Co., Inc. Buy MTW 5.875% Senior Notes due 10,15/2022 Yilma Abebe 13 Media/Broadcastinrobishirg CCMO Clear Channel Communicabons Buy CCMO 11.00% Sr. Glad. Notes due 2016 Avi Steiner 14 Metals & Mning NGDCN New Gold Inc. Buy NGOCN 7.00% Sr. Notes due 2020 Dave Katz 15 Metals & Mining BTU Peabody Energy Buy BTU 625% Sr. Notes due 2021 Dave Katz 16 Paper S Packasing VRS Verso Paper Buy VRS 11.375% Sr. Subordinated Notes due 2016 Tarek Hamid 17 Retail TOY Toys R Us Inc. Buy TOY 8.5% Secured Propco II Notes due 1-Dec-17 Carla Casella 18 Services HR Hertz Corp. Buy HTZ 5.875% Sr. Notes due 10)15/020 Yilma Abebe 19 Technology IPMT Payment Buy IPMT 10.25 % Sr. Notes due 2018 Thomas Egan 20 Technology IPMT iPayment Buy IPMT 15%115% PIK Notes due 2018 lildriCoI Thomas Egan 20 Telecommunications CTL CenturyLink Buy CTL 7.65% Sr. Notes due 2042 Thomas Egan 21 Source J.P Morgan North America Credit Research 09 Aprit 2013 J.P.Morgan Sorted by Company Name Company Name Ticker Sector Recommendation Analyst Name Page MAR Corp. AMR Mines Buy AMR 7.0% &Trend* 11.1 EETCs Mark Streeter 3 Centurytink CTL Telecommuthcatons Buy CIL 7.65% Sr. Notes due 2042 Thomas Egan 21 Clear Channel Communications CCMO MedialkoadcasbngPublishing Buy CCA40 11.00% Sr. Mead. Notes due 2016 Avi Stoner 14 Dana Holding Corp. DAN Automotive Buy DAN 6.75% Sr. Notes due 2021 Eric Selle 4 Edgen Murray Corp. EDG Energy Buy EDG 8.75% Sr. Secured Notes due 2020 Gregg Brody 9 Hertz Corp. HTZ Services Buy HTZ 5.875% Sr. Notes due 10/15/2020 Yilma Abet* 19 Hovnanian Enterprises NOV Homebuilding Buy HOV 9.125% 2nd Lien Notes due '11120 Susan Berliner 12 Payment IPMT Technology Buy IPMT 10.25 % Sr. Notes due 2018 Thomas Egan 20 Payment IPMT Technology Buy IPMT 15%15% PIK Notes due 2018 (HddCo) Thomas Egan 20 Jaguar Land Rover TTMTIM Automotive Sell TTMTIN 5.625% Sr. Notes due 2023 Eric Selle 5 Knetc Concepts Inc. KCI Healthcare Buy KCI 10.500% 2nd Lien Notes due 2018 David Common 11 Manitowoc Co.. Inc. ILITW Industrials Buy MTW 5.875% Senior Notes due 10/15,2022 Tema Abebe 13 Mohegan Gaming Authority TRIBAL Gaming Buy TRIBAL 3rd bens due '12/16 Susan Berliner 10 MOMENT Chemicals Buy MOMENT 9.0% 2nd Lien Notes due 2021 Tarok Hamid Momentwe Performance Morena's New Gold Inc. NGDCN Metals 8 Mining Buy NGDCN 7.00% Sr. Notes due 2020 Dave Katz 15 Peabody Energy BTU Metals 2. Mining Buy BTU 6.25% Sr. Notes due 2021 Dave Katz 16 Toys R Us Inc. TOY Retail Buy TOY 8.5% Secured Propco II Notes due 1-Dec-17 Carla C,asela 16 Tronox TROX ChemocalS Sell TROX 6.375% Senor Unsecured Notes due 2020 Tarek Hand 8 Verso Paper VRS Paper & Packaging Buy VRS 11.375% Sr. Subordnaled Notes due 2016 Tarek Hamid 17 VideOpenINest WOWFINFIN Cable/Satellite Buy WOWFINFIN 13 318s'19 g 5113.75.9.95% ybm Michael Pace 6 Source: J.P. Morgan Pricing in this report is the most recent available. 2 EFTA_R1_00539016 EFTA02029822 David Comte,. CM (1.212)270.5260 clavid.common©Jpmorgan com Overweight Moody's: B1 S&P: B+ Airlines Mark Streeter' (1-212) 834-5086 mark.streeterOpmorgan.com Jonathan Rau (1-212) 834-5237 jonathan.d.rau©Ipmorgan.00rn J.P. Morgan Securities LLC ANALYST` FOCUS \ LIST tt. North America Credit Research 09 Apri 2013 AMR Corp. (AMR) J.P.Morgan Buy AMR 7.0% B-Tranche 11-1 EETCs (31-Jan-18 maturity, 8-Feb-17 AL) Offered at $106.125 (5.19% yield); Target: $108.5 (4.52% yield) Credit and Investment Highlights: • AMR Corporation is the parent company of American Airlines, one of the world's largest international airlines. On 29-Nov-I I. AMR filed for Chapter I I bankruptcy protection. On 14-Feb-13, AMR and US Ainvays announced plans to merge. On 27-Mar-I3, the bankruptcy judge overseeing the case approved the merger. Final Doi and DoT approvals are expected later this year. We expect an exit from bankruptcy and merger in early 4Q13. • This deal is backed by 15 x 737.800s (1999-2001), 6 x 757-200 ETOPS (1999, 2001), 2 x 767-300ERs (1999), and 7 x 777-200ERs (1999, 2000). The 7.00% bonds are the B-tranche behind the 5.25% A-tranche. • Using a mean of appraisals from Aviation Specialists Group (ASG) and Ascend Worldwide, we calculate a current market value loan-to-value (LTV) of 84.9% through this B tranche. After applying our haircuts, we calculate our IPM LTV of 91.2% (assuming full draw of the liquidity facility which covers 18 months of interest). The step-up in leverage from the As to the Bs is 19.4%. Why This Pick Should Outperform: • We think the A-B spread in EETCs is too wide (the current range is —200- 250bps; we think fair value is 75-100bps). For the AMR 1 1 -I deal, the A-B spread appears wide at —220bps. In general, we expect B-tranches to outperform A-tranches going forward. Note that the average senior/sub spread in FIG Banks is only 55-60bps. • The —220bp spread pick-up for 19% of leverage is too wide, in our opinion, given the fact that these core-to-the-fleet aircraft are cross defaulted and cross collateralized, minimizing the probability of a rejection in the event of another AMR bankruptcy down the road. • We expect ratings on the 7%s to rise 2-3 notches once AMR emerges from Ch. II and the agencies re-rate the issuer higher (the upside at Fitch is higher if they rate the deal). Our target yield is that of our current HY BB index, which we believe is achievable for the 7%s given the short •17 average life. • We expect New American Group to achieve higher EBITDAR margins than DAL and UAL in 2014, in part due to AMR and LCC unions' negotiating away profit sharing. Specifically, we expect 2013/2014 EBT1DAR of S6.0bn and $6.8bn. or 14.9% and 16.1% margins, respectively. See our merger model here. AMR Relative Value Tidtec Rating Coupon MatuttylAvg Oh Pries Yield spread AMR 11.18 alai+ 7.00% 201812017 $106.125 5.19% 472bp UAL 12-28 Ba2i888•RBB- 550% 202012018 3104.75 4.49% 335to DAL 12-18 Ba3188 6.875% 201912017 31055 5.35% 471M Sources: JP. Morgan. Moody's. sea S&P. EFTA_R1_00539017 EFTA02029823 David Common. CM 1-212) 270-5260 clavid.commonfkpmorgan com Overweight Moody's: B2: Outlook. S S&P: BB; Outlook, P Automotive Eric J. Seale' 1-212-270-9624 [email protected] Yao Li 1.212-270-9455 [email protected] J.P. Morgan Securities LLC ANIILYS FOCUS \ LIST North America Credit Research OR April 2013 Dana Holding Corp. (DAN) Buy DAN 6.75% Sr. Notes due 2021 Offer: $110.00 (4.1% YTW, 380bp STW) Target: $112.00 (3.4% YTW, 311bp STW) J.P.Morgan Credit and Investment Highlights: • Over the past four years. Dana has lowered leverage by 2.3x (despite acquiring controlling stakes in two of its JVs) via EBITDA growth, stock issuance, asset sales and free cash flow generation. • Despite guiding to a 2% decline in sales, Dana expects FY13 EBITDA to grow 3% and free cash flow to total $250mm. Why This Pick Should Outperform: • Credit Improvement: We project Dana will generate FY13 EBITDA of $808mm, milking in coverage of 11.5x, leverage of 1.1x and net leverage of negative 0.5x. We note that the gross leverage levels are roughly half the average leverage in the J.P. Morgan High Grade index and that net debt is expected to decline 0.2x y/y. • Total Return Potential: Should the 6.75% notes (B2/BB, stable/ positive outlooks) due 2021 converge with J.P. Morgan's BB index (358bp STW), investors could achieve a 6.7% total return in the next year (or 9.0% to the 3PM split BBB Index). We believe an upgrade is likely and these returns would exceed the 5.7% YTW of the JPM HY Index and the 4.7% YTW of the Auto sector. • Relative Value: We expect Dana's notes to generate more total return than similarly rated bonds of LEA, DLPH and TRW, all of whom have similar credit profiles but are more shareholder friendly with their free cash flow, have more European exposure (3 peers generate 40% of sales from European production vs. 28% for Dana) and are less levered to the heavy duty market. Lear's 4.75% Ba2/BB rated notes of 2023 are offered at 45bps inside Dana's bonds, TRW 4.5% Ba2/BB rated notes of 2021 are 99bps inside and Delphi's Bal/BB+ rated notes of 2023arc 64bps inside. In turn, despite their shorter duration (3 competitor bonds mature in 8-10 years vs. 3-year 1st call for Dana), Dana's notes offer 6.1% current yield vs. 4.7% for its peers. • Liquidity: In FY13, we estimate Dana will generate $424mm in core free cash flow (EBITDA less capex, interest and taxes), which represents 47% of its outstanding debt. Dana's bond covenants are fairly weak, as they offer little protection over restricted payments to equity holders. Despite our projection for Dana to spend $104mm on preferred and common dividends and repurchases of common stock, we expect Dana to generate $203nun of free cash flow. We contrast this fully loaded free cash flow versus projections of negative $391mm at Lear and negative $348mm at TRW due to their shareholder friendliness. Dana also has no considerable outstanding debt maturing until 2019 and $1.4bn in total liquidity. DAN — Relative Value Ticker Baling Coupon Maturity Offer Price YTW STT '13E Lev DAN 8268 6.750% 2021 110.00 4.1% 3806p 1.1X DLPH Ba1BB• 5.000% 2023 10725 3.8% 316bp 1.0x LEA Ba2/88 4.750% 2023 97.75 5.0% 335bp 1.0x TRW Ba2188 4.500% 2021 101.50 4.1% 281bp 0.9x Sewer: J.P. Morgan. Moody's. and S&P. 4 EFTA_R1_00539018 EFTA02029824 David Common. CM 1-212) 270-5260 clavxd.commonapmorgan cum Underweight Moody's: Ba3: Outlook. S SW: BB-: Outlook, P Fitch: BB-: Outlook, S Automotive Erie J. Salle` 1.212.270-9624 [email protected] Yao Li 1-212-270-9455 Yao.Lifajpmoroan.00m J.P. Morgan Securities LLC ANALYS FOCUS \ LIST 'k, North America Credit Research 00 April 2013 Jaguar Land Rover (TTMTIN) Sell TTMTIN 5.625% Sr. Notes due 2023 Offer: 5105.875 (4.7% YTW, 342bp STW) Target: $97.25 (6.0% YTW, 430bp STW) J.P.Morgan Credit and Investment Highlights: • Jaguar Land Rover (JLR) designs, develops, manufactures and sells premium sports sedans and sports cars (Jaguar brand) and premium all-terrain vehicles (Land Rover brand). During its 3Q12 ended Dec. 2012, JLR's revenues grew 1% to £3.8bn but its EBITDA fell IrA to £0.5bn due to elevated product development costs and mix degradation. After £0.2bn of YTD cash bum, JLR ended 3Q12 with net debt of negative £0.3bn. At Dec. 2012, the company had cash of £2.1bn and undrawn committed facilities of £1.0bn. Why This Pick Should Underperform: • Credit Profile: For FYI 3E we estimate JLR will generate EBITDA of £2.2bn. After backing out nearly £0.9bn of capitalized R&D, EBITDA would total £1.3bn and total leverage would be 1.7x. We expect EBITDA to lag its £2.4bn of expected cape; taxes, interest and pension provisions. While some of this cash bum is offset by £0.5bn in estimated working capital inflows, JLR's capex should remain elevated for the next couple years. Due to JLR's new UK engine facility, its JV in China with Chery and potential for projects in Brazil and Saudi Arabia, we project 2014-15 capex to average £2.7bn per year. These levels of capex arc £1.0bn above the average annual capex experienced in FY12-13. More importantly, JLR's FY14-15 capex is expected to exceed fully loaded EBITDA (before backing out capitalized R&D) by £0.3bn. • Relative Value: JLR's 5.625% Ba3/BB- rated notes of 2023 are offered at 4.7% YTW and 342bp stt. These levels compare to the 5.3% YTW and 493bp stt generated by Chrysler's 8.25% BIB rated notes of 2021. Chrysler also has close to zero net debt, but is less European focused. Furthermore, Chrysler generates free cash flow, as its FY13 estimated EBITDA exceeds capex by StSbn. We expect JLR's FYI4 EBITDA (ex capitalized R&D) to lag its capex by £0.6bn. • European Exposure: During the LTM as of Sept. 2012, JLR's sales were split between Europe at 22% (ex Russia and UK), UK 19%, NA 18%. China 19%, AP 5% and ROW 17%. We note that its 41% combined European exposure could hurt results in the future. IHS is projecting total European production to be down Wo y/y in IQI3 and down 3% for FY13 after declining 5% during FYI2. We expect JLR to outpace overall EU volumes due to its luxury focus and new products, but note that profits have been hit over the past two quarters due to mix (new lower priced products selling more volumes but less profits than prior products). For example. JLR's 3Q12 retail volumes were up 14%, but its EBITDA was down 17% and caused its EBITDA per retail sale to plunge 27% y/y. TTMTIN- Relative Value Tielw Rating Coupon Maturity Mr Pries TM STT 113E Lev TTMTIN Ba3/B8. 5.625% 2023 105.875 4.7% 3420 1.7x CHRYGR 8143 8.250% 2021 t12.000 5.3% 493tp 2.0x Sources' JP Morgan. Moody's. art SSP. EFTA_R1_00539019 EFTA02029825 David Common. CM I 1-212) 270-5260 david.commonfkpmorgan com Overweight Moody's: B2; Outlook, S S&P: B; Outlook, S Cable/Satellite Michael Pantie (1-212) 270-6530 Michaelpace(g)jumorgan.com Maxx Kauffman (1-212) 270-6797 Maxx.d.kautImanajpmorgan.com J.P. Morgan Securities LLC ANALYST' FOCUS \ UST North America Credit Research 09 Aprit 2013 WideOpenWest (WOWFINFIN) J.P.Morgan Buy WOWFINFIN 13 3/8s '19 @ $113.75, 9.95% ytm Credit and Investment Highlights: • Financial results for WideOpenWest have been generally in line with our expectations. Unit adds have been slightly below our estimates, as we suspect chum remains elevated in acquired Knology markets, but reported revenue and adjusted EBITDA growth has been in line (+4% to +5% y/y). We expect similar results/trends in 1Q13 (+3% revenuc/EBITDA growth; slightly negative PSUs) and for results to pick up momentum beginning in 2Q13 (timing of rate increases, progress on Knology integration, etc.). We continue to model full-year revenues, reported adjusted EBITDA, and capex of —51.25bn (+4%), —5452mn (+8%), and 5230mn, respectively. • Following the company's successful hank refinancing, we note WOW is now FCF positive on a runrate basis (albeit slightly). WOWFIN recently refinanced its $1.915bn TLB with a new $1.96bn facility (incremental for fees/revolver paydown). We estimate this refinancing will save the company —530m in annual interest expense. With this event behind the company, we think focus for investors should shift to operational execution, which we expect to show more meaningful progress in 2Q13 and beyond. • We expect leverage to improve during 2013. At year-end 2012, total net leverage was 7.0x, unsecured leverage was 6.3; while bank leverage was 4.6x. We forecast these metrics to decline to 6.6x, 6.0x, and 4.4x at year-end 2013. Why This Pick Should Outperform: • We continue to view WOWFIN as our top total return idea within HY cable/satellite. In our opinion, WOW bonds still offer double-digit return profiles (big coupons), even after a few points of run-up since the beginning of 2013. This compares to our 4% to 6% return expectations for most other high- yield cable/satellite bonds and a HY market trading just inside 6%. Although the bonds have already hit our original price targets (January 28, 2013 initiation report) we still think upside exists, particularly in the 13 3/8% subordinated notes. W0WFIN Relative Value Tkker Rating Coupon Maturity Old Peke Y7W Gross Lev Nat Lev CHIR B1/B6- 7.375% 2020 111.0 4.26% 5.2x 5.2x CVC (HoldCo) 8118• 7.750% 2018 112.3 4.96% 5.1x I.7x DISH Ban& 7.875% 2019 115.5 5.01% 4.8x 1.6x MCCC (LLC) 8318- 7.250% 2022 109.5 5.35% 5.4x 5.4x CEOUEL 83/8- 6.375% 2020 103.8 5.57% 6.1x 5.fat WOWFIN Caa1l000• 10250% 2019 111.0 7.67% 6.3x 6.3a WOWFIN Caa11CCC• 13.375% 2019 112.8 10.18% 7.0x 7.0x CabW5at Index 5.63% Global HY Index 5.88% Spit B Index 7.40% Sources J P Morgan, Moody's. and S&P Note DISH *Arne is No Nona tared:al issuance, CH1R leverage a trough CCOH pm lama la Optimtrn Vies* acquAtcn and francng and includes CCVII prelerrods. CVC leverage pro (card IN Op&rtrn West sale and narnaideti fOr Hurkaro Sandy 6 EFTA_R1_00539020 EFTA02029826 David Common. CM 1-212) 270-5260 clavicl.commonfkomorgan com Overweight Moody's: Gael; Outlook, S S&P: CCC; Outlook, N Chemicals Tarek Remit (1-212) 834-5468 Tarek.x.hamid©jpmorgan.com Jon J. Mann (1-212) 834-7239 Jonathantinannapmorgan.com J.P. Morgan Securities LLC ANALYS FOCUS \ UST North America Credit Research 09 April 2013 J.P.Morgan Momentive Performance Materials (MOMENT) Buy MOMENT 9.0% 2nd Lien Notes due 2021 Offered at $77.50 (13.81%); Target $94.66 (10.0%) Credit and Investment Highlights: • Momentive Performance Materials is a former subsidiary of General Electric that was purchased by Apollo Management and its affiliates via a leveraged buyout in December 2006. The company is the world's second largest producer of silicones and silicone derivatives and is a global leader in products derived from quartz and specialty ceramics. • On April 1st, Momentive reported in-line 4Q12 results. Segment EBITDA of $50 million was in line with our estimate of $51 million. Momentive results improved sharply from a very disappointing 4Q12, driven by cost reduction initiatives and volume increases in the silicones business, but still remain well below normalized earnings levels. Momentive finished 4Q12 with $362 million of liquidity, up sharply from 3Q12. The company also disclosed that it has entered into a new $75 million cash flow facility to supplement the company's $270 million ABL facility. Why This Pick Should Outperform: • The company began to comp positively on EBITDA in 4Q12 as the silicones industry continues to grow into capacity. Leverage remains highly elevated; however, we do not believe anything is fundamentally broken in the Momentive business model. Modest volume growth and fixed cost absorption are the focus for 2013, and should help drive Silicones earnings higher sequentially through the year. Price increases in silicones are likely a 2014 story at best. Additionally, quartz results should improve through 2013 as semiconductor demand recovers. In the interim, liquidity looks strong (PF 4Q12 liquidity north of $435 million), and the company has no maturities until 2016. • Longer term the sustainability of the capital structure remains a question. However, the company has many potential options to address the capital structure, including debt-for-equity swaps, refinancing of expensive first and 1.5 lien debt, asset sales, and potentially a merger with sister subsidiary Hexion. Most importantly, we are very comfortable with enterprise valuations greater than $2.5 billion, and that implies a very high recovery floor on the 9% Notes no matter the capital structure machinations. MOMENT Relative Value Ticker Rating Coupon Maturity Price Y1W STW MOMENT Bl/CCC• 8.875% 2020 105.000 7.74% 706bp MOMENT 82/CC 10.00% 2020 101.000 9.76% 9104) MOMENT Caa1/CC 9.00% 2021 77.760 13.74% 1,206bp TRINSE BRED 8.75% 2019 99.250 8.91% 825to PERHOL Caa2/CCC 11.00% 2017 103.125 9.80% 94Eto 8.75% 2020 104.750 7.70% 7024 Sources. J P Morgan. Moody's. and S&P. EFTA_R1_00539021 EFTA02029827 David Common. CM i1-212) 270-5260 clavid.common©Jpmorgan com Underweight Moody's: Ba3; Outlook, S S&P: BB; Outlook, S Chemicals Tarek Hamicec (1-212) 834-6468 Tarek.x.hamid©jpmorgan.com Jon J. Mann (1-212) 834-7239 Jonathantinannapmorgan.com J.P. Morgan Securities LLC ANALIIS FOCUS \ LIST North America Credit Research 00 April 2013 Tronox (TROX) J.P.Morgan Sell TROX 6.375% Senior Unsecured Notes due 2020 Bid at $96.50 (6.99%); Target: $91.09 (8.00%) Credit and Investment Highlights: • Tronox is the fifth largest global producer of both titanium dioxide and titanium feedstocks. Titanium dioxide has an unparalleled ability to impart the color white and is very difficult to substitute in painting and dying applications. The TiO2 industry has all the hallmarks of a very profitable commodity, with growing demand, low threat of substitution, and a high concentration of market share among a few participants. However, with the exception of a few brief moments of success, the industry has generally disappointed. • On February 2Ist Tronox reported disappointing 4Q12 results. Reported EBITDA of $71 million compared with the pre-released EBITDA of $70 million. Reported results matched the preliminary results provided earlier in the month, but Pigments results were surprisingly negative. Tronox burned cash during the quarter, driven by a large outflow from accounts payable. Management expects pigment prices to decline further in IlQ13, consistent with other industry players. Why This Pick Should Underperform: • The profitability of the pigments and mineral sands industries are highly dependant on operating rates given their commoditized nature. Softening demand from European and Asian construction markets, highly elevated inventories and lower per unit customer consumption has driven a significant decline in pigment volumes and pricing since 2Q12. The recent collapse in pigment demand has also significantly impacted the mineral sands industry, which is heavily dependant on the pigments end-market. Mineral sand prices are down 10-30% across grades YTD, despite significant reductions in production from industry leaders, including Iluka. • On recent calls, Tronox has noted that it is interested in pursuing strategic opportunities and the stated priority use of the company's new term loan is potential acquisitions. Separately Rockwood CEO Seifi Ghasemi has said that Rockwood will "pursue every possible option" to divest the company's Sachtleben pigments portfolio during 2013. Additionally, given Huntsman's efforts to buy Tronox out of bankruptcy, media reports have focused on the possibility Tronox would buy Huntsman's TiO2 assets instead. We believe the acquisition of either of these assets would be a significant leveraging event for Tronox, as we outlined in our recent initiation. • Tronox B2/BB- rated bonds currently trade inside 7%, and we believe a downgrade from S&P would likely push bonds wider. Current ratings at S&P look very high given acquisition risk, the cyclicality of the industry, and it's severely challenged current operating environment. TROX Relative Value Ticker Rating Coupon Maturity Price YTW STW TROX 82J88- 6.375% 2020 96.50 6.99% 632bp ROC B.32188 4.625% 2020 102.75 4.06% 339bp HUN BUN- 4.875% 2020 101 4.71% 404bp PERHOL 8.75% 2017 106 6.57% 626bp Sources: J.P. Mown. Mcacjs, and SW. 8 EFTA_R1_00539022 EFTA02029828 David Comte,. CM (1.212)270.5260 clavid.common©Jpmorgan com Overweight Moody's: Caal ; Stable S&P: 8+, Stable High Yield Energy Gregg Brody (1-212) 834-5997 Gregg.w.brody©jpmorgan.00m J.P. Morgan Securities LLC AtIALYS" FOCUS \ LIST EDG Relative Value North America Credit Research 09 Apra 2013 Edgen Murray Corp. (EDG) Buy EDG 8.75% Sr. Secured Notes due 2020 Offered at 5105 (7.63%); Target: 5108 (7.00%) J.P.Morgan Credit and Investment Highlights: • Edgen Group is a global distributor of steel products primarily to the energy, mining, power, petrochemical and civil construction markets. Edgen offers a broad product catalog of more than 14,000 specialty products and maintains inventory in more than 100,000 tons of pipes, plate and sections, including highly engineered prime carbon or alloy steel pipe, pipe components. valves and high grade structural sections and plate. Edgen also provides OCTG to the upstream conventional and unconventional U.S. drilling markets. For the twelve months ended December 31, 2012, Edgen generated pro forma sales of 52.1billion and Adjusted EBITDA of $145 million. • Fundamentals for EDCMUR have softened, but continue to improve year over year. The company recently provided 2013 revenue guidance of $2.0-$2.2 billion (+2.2% yly) and EBITDA guidance of $142-5152 million (+1.4% y/y). International and GOM energy are expected to improve, while weakness in North American should impact OCTG growth. Management expects EU revenues to improve 10.6% y/y, while OCTG is expected to decline 8.2% y/y. Why This Pick Should Outperform • Continuing to deleverage. We expect the company to continue to deleverage through out the year, paying down bank debt with excess cash flow of approximately $70 million. We expect Secured Debt/EBITDA to continue to improve by YEI 3, to 3.6 x from 4.2x • Compelling Relative Value. Secured bonds offered at S105 and 7.6% YTW look cheap relative other secured Low B/CCC rated distributors of steel products and Energy service companies that are not deleveraging at the same rate as EDG. In addition, given the relative YTW of BB (4.4%). B (5.7%) and split B (7.3%), we believe EDG will outperform Amt Next Debt/ Ticker Coupon WAIN Maturity Call Date Ratings Price YTW STIV EBITDA EDG 8.750% 540 1-Nov-20 1-Nov-15 Caa1115+ $104.00 7.85% 715 4.2x Metals Distributors RYI 9.000% 5603 15-Oct.17 15.44pr.15 Csa2./CCC• $110.00 5.80% 558 4.9x High Beta Energy EXPRO 8.500% 5991 154)806 15-Dec-13 BNB 810625 5.22% 509 3.8X FLI 9.250% $1,300 15-Oc1-20 15-Aiy.15 132/8+ $105.75 7.941 724 6.3x HERO 10.25% $200 1-Apri-19 1.Apr-15 Csa1/8 511115 7.49% 126 5.2x VTG 7.500% $1,150 1-Nov-19 1-Nov-15 83/B- 5103.50 6.73% 603 12Az Sowee: J.P. Morten. Moody's and SW. EFTA_R1_00539023 EFTA02029829 David Common. CM i1-212) 270-5260 david.commonfkpmorgan com Overweight Moody's: Caal; Outlook, S S&P: B-; Outlook, S Gaming Susan Berliner 4 (1-212) 270-3085 susan. bediner@jomorge n. corn Richard DeGaetani (1-212) 834-9524 richard.j.clegeetandgijpmorgan.com J.P. Morgan Securities LLC FOCUS \ LIST let North America Credit Research OR April 2013 J.P.Morgan Mohegan Gaming Authority (TRIBAL) Buy TRIBAL 3rd liens due '12/16. Offered at $98.750 (10.911%); Target: $101.00 Credit and Investment Highlights: • Mohegan is the largest tribal casino operator in the U.S., with its flagship property being Mohegan Sun in CT. while it also owns Mohegan Sun at Pocono Downs in PA (located on commercial land). Unlike most tribal credits, TRIBAL is a public filer and has a database of customers in excess of 4 million. Management has been focusing on diversifying its operations with a small investment made in A.C. (Resorts) and a management contract in place. TRIBAL is also vying for a license in Western MA and is pursuing a management agreement with the Cowlitz tribe for a project in La Center. WA. • Management recently obtained third-party financing to construct a hotel at its PA property which should help generate traffic and is also pursuing a new hotel in CT. In '9/12, the authority implemented a 520mm cost savings program. and management continues to look for additional cost saving opportunities. Why This Pick Should Outperform: • Attractive Relative Value. These bonds offer one of the highest yields in the sector at 10.91%, which we believe is quite attractive given management's focus on deleveraging. In addition, potential upcoming positives include monetizing non-core assets, refinancing its capital structure, and improving monthly gaming numbers, while additional cost savings should bolster margins. • Focused on Debt Reduction/Refinancing. We believe management is already focused on refinancing its entire capital structure, as its Revolver & TL-A mature in '3/15, its 10.5% 3rd liens and 11% sub notes are currently callable at par, while its TUB becomes callable on 3/6/14 and its 2nd liens become callable in 11/14. Although the company is currently not generating free cash flow, we estimate that in 2015 it will generate just over S50 mm (which is when the relinquishment payments cease) with FCF targeted at debt reduction. We also believe a non-core asset sale could facilitate deleveraging, and we estimate its retail mall at the CT property could generate roughly S 150mm of proceeds. We estimate roughly SI3mm of term loan amortizations in 2013, and in 2/13, TRIBAL retired a 515.8mm bond maturity and has a S21.2nun bond maturing in 8/14 which it expects to pay off with cash on hand. • Collateral Available. Although TRIBAL is a Native American casino and thus has a component of sovereign risk, its Pocono Downs facility is not located on sovereign land and was recently appraised for 5482mm. In addition, collateral includes a leasehold mortgage in non-gaming assets that produce an income stream and could be used for a sale-leaseback or an outright sale. These include a 1,175-room hotel. 50-outlet retail mall. 10K seat arena, and convention/meeting space. Of course any asset sale would need to comply with bank covenants as well as bond covenants (meaning some debt pay down). TRIBAL Relative Value Ticker Rating Coupon Maturity Price YTW STW TRIBAL Cas3/CCC 10.50% 2016 98.75 10.91% MNTG Caa1/B- 11.50% 2019 10425 10.25% 957bp BORGAT 82/8. 9.50% 2015 104 00 1.72% 750t0 Sources. J P klorgen. Mccdys and S&P 10 EFTA_R1_00539024 EFTA02029830 David Conrad'''. CM (1.212)270.5260 clavicl.common@ipmorgan com Overweight MoOdy'S: B2; Outlook, S S&P: B; Outlook, S Healthcare David Common, CFA '4 (1-212) 270-5260 dayid.commoneljpenorgan.com Jared Feeney, CFA (1.212) 270-0699 jared.a.feeneyQpnbargan.com J.P. Morgan Securities LLC AINALYS' FOCUS \ LIST let North America Credit Research 09 April 2013 Kinetic Concepts Inc. (KCI) J.P.Morgan Buy KCI 10.500% 2nd Lien Notes due 2018 Offered at $109.13 (8.06%); Target: $110.50 (7.72%) Credit and Investment Highlights: • Kinetic Concepts, Inc. pioneered negative pressure wound therapy ("NPWT"), which represents over 70% of EBITDA today. It diversified into soft tissue biologics by buying LifeCell for $1.7 billion in 2008 (-12x EBITDA). FYI2 revenues and EBITDA were $1.7 billion and $753 million. Kinetic Concepts has two segments: o KCI — advanced wound therapies, over 90% of which is NPWT. For FY 12, MIS reported revenues of $1.3 billion. o LifeCell — market leader in soft tissue matrices, with an estimated 60% market share. For FY 12, LifeCell reported revenues of $434 million. • Acquired in 2011 by Apex, the Canada Pension Plan Investment Board, and the Public Sector Pension Investment Board for $6.3bn (—8.5x EBITDA). • In November, KCI sold its TSS (bed business) to Getinge AB for about $250 million. This business had a run-rate EBITDA of approximately $25 million. • In January, CMS announced the competitive bidding payment amounts for Round 2. NPWT will face a weighted price cut of about 41% beginning in July for this Round. The annualized pricing impact is about S30 million. Why This Pick Should Outperform: • In our view, the value of LifeCell, plus cash, about equals first lien debt. • We think KCI will deliver 2013 EBITDA of -$700mm vs. our mid-2012 expectation of $640mm. Revenue has been weaker than expected, but cost- cutting has far outpaced. • We don't think competitive bidding results will materially impact pricing on the non-Medicare NPWT (-90% of NPWT revenues) business any time soon. • LifeCell revenue growth should rebound a few percentage points, and modest acquisitions may add to that in year ahead. • Liquidity looks strong with $500mm in cash, and we expect FCF generation of about S125mm this year, about 3% of total debt. • We're not counting on "the device tax" being rescinded. But that has some bipartisan support and could be a modest boost to EBITDA if enacted. • The second liens are rated FOB. But they've never traded in line with that index and now trade close to the CCC index, which has outperformed: The 10-1/2s are offered only —75bps inside CCCs, vs. an average of 175bps in the last year. KCI Relative Value Deka Rating Coupon Maturity PrIca YIW STY CONVAT Caa143 10.500% 15-Dee-18 111.75 6.03% 583bp KCI 10.500% 1-Nov-18 109.13 8.06% 744bp KCI CaalfCCC+ 12.500% 1-Nov-19 10025 12.42% 1,180bp Sources: J.P. Morgan. Mcodys and S&P. 11 EFTA_R1_00539025 EFTA02029831 David Conrad'''. CM (1.212)270.5260 ciavid.commonfkpmorgan com Overweight Moody's: Caa2; Outlook, S S&P: CCC+; Outlook, S Fitch: CCC; Outlook, S Homebuilding Susan Berliner' (1-212) 270-3085 [email protected] Richard DeGaetani (1-212) 834-9524 [email protected] J.P. Morgan Securities LLC ANALYST‘ FOCUS LIST North Amends Credit Research 09 Apra 2013 Hovnanian Enterprises (HOV) J.P.Morgan Buy HOV 9.125% 2nd Lien Notes due '11/20 Offered at $112.25 (6.39%); Target: $114.000 (5.72%) Credit and investment Highlights: • ilOV operates in 37 housing markets throughout 16 states and is the 6th largest public homebuilder based on closings. The company serves a diverse mix of end customers with exposure to first-time home buyers (33%), move-up buyers (33%). luxury buyers (21%), and active adult buyers (13%). Its largest markets based on revenues include the Southwest (36%), Mid-Atlantic (19%). Northeast (16%), California (13%), and Midwest (7%). • With only $127nun of debt coming due prior to 2016, near-term maturities seem quite manageable. Although HOV's liquidity options are much more constrained than its peers, HOV's liquidity levers include its land banking arrangement with GSO and potentially equity issuance or non-recourse mortgages. • We believe these bonds are covered with inventory of $575.2mm and cash of $219.1mm. This $794.3mm of collateral roughly covers the $577mm 1st lien bonds and these $220mm 2nd lien bonds. We expect HOV's inventory position to increase with the improvement in the overall market. Why This Pick Should Outperform: • Strong Housing Fundamentals. We believe the housing recovery is here to stay and anticipate a very solid spring selling season due to significant pent-up demand, low inventory, excellent affordability. and the improving job market. Although the overall sector trades quite rich, this is one of the yieldier bonds in the sector, as well as one of the few secured bonds. • Attractive YTC. We expect these bonds to be refinanced on the first call date (11/15/15) at $106.844. With ow expectations for a continued housing recovery over the next few years, we believe HOV could refinance these bonds at a notably lower coupon, which could save HOV S6mm annually (assuming a 6.5% coupon). Although this bond has tightened a lot, it still offers 70 bps of pickup over the JPM HY Index and remains one of the cheapest bonds in the sector. • Expected Improvement in Earnings vs. Some of its Peers. We estimate HOV will generate EBITDA of $137.3mm in 2013 versus $58.3mm for BZH and 5146.2mm for KBH. We estimate HOV's net debt/EBITDA will end 2013 at 9.58x versus 20.4x BZH and 9.44x for KM. • Other Potential Events. HOV could issue equity/converts (equity market cap is S750mm versus $366mm for BZH), or HOV could look to clean up the $127mm of front-end bonds by issuing a new unsecured bond with a longer maturity. HOV could also once again expand its land banking arrangement with GSO. • Technical Bid. HOV is the highest yielding issuer in a sector that has significant positive operating momentum and few secured bonds. 11OV is trading about 240 bps behind BZH's 2nd lien bonds. HOV Relative Value Ticker Rang Coupon Maturity Price VW/ STW SDI 8218 8.625% 2018 109.00 3.85% Bap HOV Caa2tCCC- 9.125% 2020 112 25 8.39% 572tp Sources: J.P. Morgan. Moods. end UP. 12 EFTA_R1_00539026 EFTA02029832 David Common. CM (1.212)270.5260 clavid.commongkomorgan com Overweight Moody's: B3; Outlook, P S&P: B+; Outlook, S Industrials Vilma Abate` (1-212) 270-3265 yilma.atebetppmorgan.com Ryan Dean (1-212) 270-9566 ryan.p.deanapmorgan.com J.P. Morgan Securities LLC ANALYS FOCUS \ LIST North America Credit Research 09 Ape 2013 Manitowoc Co., Inc. (MTW) J.P.Morgan Buy MTW 5.875% Senior Notes due 10/15/2022 Offered at 5105.25 (5.0%); Target: 5108.00 (4.5%) Credit and Investment Highlights: • Geographic and customer diversification in attractive end markets. Approximately 60% of MTW's business is tied to cranes, with the remaining 40% tied to foodservice. The crane business serves heavy construction, infrastructure, commercial construction, and high-density residential projects. The foodservice business services a wide variety of end markets, including food retail, travel, education, healthcare, and restaurant markets. Nearly 50% of the business is outside of North America and no single customer accounts for more than 5% of total consolidated sales. • Sensitive to economic cycles. Manitowoc's crane business is highly sensitive to the macro-economy. Manitowoc's foodservice equipment business diversifies the company's exposure to the highly cyclical cranes business. • Fourth quarter results were solid and in line with our expectations. Manitowoc reported 4QI2 revenue of SI,130 million, increasing 9% yly, about in line with our estimate of 51,162 million. Adjusted EBITDA in the quarter was $117 million, improving 32% y/y, in line with our estimate of $120 million. Margins improved 190bps yly due to operating leverage in the crane business and cost saving initiatives in the foodservice business. The company's food services segment has grown over the last year and has consistently improved margins. We expect margins to continue to expand in both business segments. Why This Pick Should Outperform: • Over the next twelve months, we expect a meaningful decrease in leverage. Our model shows the company de-levering to the mid-3s or lower by year-end 2013 with very little benefit from MTW's end markets improving. The company has a stated goal of reducing debt by —$200 million in 2013. • The credit remains one of our top risk-adjusts return ideas in Industrials. While yields are below average relative to the overall high yield market, in the tightly trading industrial universe we think MTW 5.875s still have upside. Over the next twelve months, we expect MTW's bonds to support BB valuation. The J.P. Morgan domestic BB index is now at —4.4%. MTh Relative Value Ticker Rating Coupon Maturity Price `ITV STW MTN' 838+ 5.875% 2022 10525 5.03% 379e9 TEX 83111. 6.000% 2021 10510 4.86% 4o0:9 Sauces. J P Slogan. Moody's, and S&P. 11 EFTA_R1_00539027 EFTA02029833 David Comte,. CM (1.212)270.5260 ctancl.common©Jpmorgan com Overweight Moody's: Ca; Outlook, S S&P: CCC+; Outlook, N Fitch: CC: Outlook, S Media/Broadcasting & Publishing Avi Steiner, CFA" (1.212) 270-5512 avi.a.steinerapmorgan.com Kenneth Norden (1.212) 270-1564 kenneth.r.nordengpmorgen.com J.P. Morgan Securities LLC ANALYSt FOCUS \ LIST 1k. North America Credit Research 09 Apri 2013 J.P.Morgan Clear Channel Communications (CCMO) Buy CCMO 11.00% Sr. G'teed. Notes due 2016 Offered at 580.00 (19.46% YTW, +1913 STW) Credit and Investment Highlights: • Clear Channel Communications is a diversified media and entertainment company that owns 840 domestic radio stations in 150 U.S markets, in addition to 108,000 display structures in the Americas outdoor segment and 650,000 displays across 28 countries outside the Americas through its 89% owned Clear Channel Outdoor subsidiary. Clear Channel also owns Katz Media Group, a full service media representation business, and Premiere Networks, a national radio network that produces, distributes or represents —90 syndicated radio programs and serves more than 5,000 radio station affiliates. • On February 28, 2013, Clear Channel priced a 5575mm 11.25% Priority Guaranteed Note offering due 2021. The proceeds. along with a draw under the company's ABL and cash on hand, were used to prepay S847mm of its Term Loan A due 2014. By repaying the Term Loan A, the company gets additional flexibility to pursue unlimited below par non pro rata dutch tender offers for the Term Loam B and the ability to use S200mm of cash to repurchase legacy notes that mature prior to 2016. • On February 19th, 2013, Clear Channel reported its fourth quarter 2012 and full year results. Total 4Q revenues of S1,696.3bn, up +2.6%. and EBITDA of 5546.6mm. up +6.0%, slightly beat our estimates on the back of strength in both the radio and outdoor segments. Management highlighted pacing data for CCME of -3% (Radio of +2%), Americas of +2%. and International of -1%. Why This Pick Should Outperform: • While the top line in 2013 will likely be negative in the first half of the year, related to Europe in Outdoor and Traffic and Network comps in Radio, we expect YoY expense declines will largely offset the revenue softness, resulting in flattish EBITDA. • As Clear Channel looks to address its 2016 bank debt stack (having just repaid the TL A) via exchanges and extensions, we believe the LBO Notes, which also mature in 2016, will shortly become the next tranche in focus. We believe an exchange/extension of the LBO Notes would make it easier for the company to tackle a larger portion of the 2016 secured stack. • The —557.4mm AHYDO related par repayment due on August 1st of this year represents approximately —7% of the issue, and will likely occur prior to any exchange/attempt to address the LBO Notes. The payment effectively increases the calculated return of the 11% Notes. Though volatile, the CCMO LBO Notes offer Media investors well above average yields within our coverage universe. CCM0 Relative Value Tkker Rating Coupon Maturity Price rnv anv CCMO CMCCC+ 11.000% 2016 80.000 19.46% 1913tp CCM() CalCCC+ 10.750% 2016 78.503 19.91% 1959bp Sources: J P Morgan. Moody's. arid S&P. 14 EFTA_R1_00539028 EFTA02029834 David Comte,. CM 1-212) 270-5260 davicl.commonfkomorgan com Overweight Moody's: B1; Outlook, S S&P: BB-: Outlook, S Metals & Mining Dave Katz, CFA' (1-212) 270-4593 [email protected] Baying Bashtaeva (1-212) 270-1372 Bayine.bastitaevaajpmorgan.com J.P. Morgan Securities LLC ANALYST FOCUS LIST 111. North America Credit Research 09 Aprit 2013 New Gold Inc. (NGDCN) J.P-Morgan Buy NGDCN 7.00% Sr. Notes due 2020 Offered at 5108.125 (5.13%); Target: $110.50 (4.34%) Credit and Investment Highlights: • New Gold is a mid-size gold producer, headquartered in Canada. The company has four operating mines in the US, Mexico, Australia and Canada. New Gold produced 412 koz of gold in 2012 with total cash costs of $421 per ounce. For 2013, the company forecasts gold production of 440 koz to 480 koz at total cash costs of $265 to $285 per ounce. • New Gold's New Afton project has outperformed. The Canadian mine met its targeted June 2012 production start and began commercial production in July 2012. In 4Q I2, the mine operated at 11,700 tonnes per day, above its design capacity of 11,000 tonnes per day, highlighting New Gold's successful tamp-up. New Gold also has two development projects: the 30%-owned El Morro project in Chile and the 100%-owned Blackwater in Canada. • New Gold is a low cost gold producer, benefiting from significant by- products credits. On a consolidated basis, we believe New Gold is at the border of the first quartile and the second quartile of the industry cost curve. Why This Pick Should Outperform: • New Gold has lagged the tightening of the overall market. In our opinion, the credit should trade at least 50bps inside of the Split BB index, which implies 2.5 points of upside on relative value alone. • We believe gold is better positioned than prices indicate. As recent events would suggest, geopolitical risk remains in the system. Prices remain low compared to producers' all-in sustaining costs. The recent nonfarm payrolls report indicates that the US economy remains weak. European GDP estimates have been revised downward. We believe this environment will likely drag other commodities down and that gold will outperform. • We forecast an improvement in the company's credit metrics. Even when using forward prices, we forecast that NGDCN's gross leverage will drop from I.9x at 4Q12 to 1.7x by the end of IQ13. We expect the company's IQI3 EBITDA will improve y/y by 48%. By I Q14, we expect the company to have negative net leverage. The company's balance sheet appears stalwart. Liquidity/debt was 91% at 31-Dec-12 and should increase to 97% by the end of 2013. NGDCN Relative Value Ticker Rating Coupon Maturity Price YTW STW ELDCN BOBS 6.125% 2020 104.75 5.15% 446 IMGCN 81198- 6.750% 2020 97.00 7.28% 554 NGOCN B2438- 7.000% 2020 108.13 5.13% 444 NGDCN 62438- 6.250% 2022 105.50 5.36% 362 FMGAU 8141+ 6.875% 2022 10625 5.77% 404 CARML1 81188 6.875% 2018 107.50 4.62% 439 IMNCN 81B« 7.500% 2021 108.38 514% 505 Sources: J.P. Morgan. moody& and S&P. EFTA_R1_00539029 EFTA02029835 David Comilla'''. CM (1.212)270.5260 david.commonfkomorgan corn Overweight Moody's:Ba1; Outlook, S S&P: BB+; Outlook, S Fitch: BB+; Outlook, S Metals & Mining Dave Katz, CFA (1-212) 270-4593 [email protected] Bayina Bashtaeva (1-212) 270-1372 Bayina.bashtaevatillpmorgan.com J.P. Morgan Securities LLC MIALYS FOCUS \ LIST tki North America Credit Research 09 Apre 2013 Peabody Energy (BTU) J.P.Morgan Buy BTU 6.25% Sr. Notes due 2021 Offered at 5104.25 (5.62%); Target: $107.00 (5.23%) Credit and Investment Highlights: • Peabody Energy is the largest private-sector coal company, with thermal coal operations in the US and metallurgical and thermal coal operations in Australia. The company serves coal customers in more than 25 countries on six continents. As of 31-Dec-I2, Peabody owned interests in 28 coal mining operations, including a majority interest in 27 coal mining operations located in the US and Australia and a 50% equity interest in the Middlemount Mine in Australia. In 2012, 55% of the company's coal revenue was generated from its US operations, with the rest coming from Australia. In addition to its mining operations, Peabody is engaged in marketing, brokerage and trading of coal through trading and business offices in China, Australia, the United Kingdom, Germany, Singapore. Indonesia. Mongolia and the U.S. In 2012. Peabody sold about 75% of its total sales (by volume) to U.S. electricity generators, 23% to customers outside the U.S. and 2% to the U.S. industrial sector. Why This Pick Should Outperform: • A weak first quarter is expected. Consensus for 1Q13 EBITDA is $235 million, down from $409 million in 4OI 2. The lower sequential result reflects higher costs during the conversion to owner-operator status at two Australian mines, as well as higher than normal overburden removal, lower realized metallurgical coal pricing, lower U.S. sales and pricing and startup costs. • But the rest of the year should show quarter-on-quarter Improvement. The conversion to owner-operator status should be completed in April 2013, lowering costs at those mines. Stripping ratios are expected to drop through the year. Finally, although we remain cautious on metallurgical coal prices, we believe they will trend up sequentially. We estimate this will result in 36%. 24% and 10% sequential quarterly EBITDA growth, in 2Q13, 3O13, and 4Q13, respectively. • We believe the company is better positioned than its competitors. The company's shill into PC1 coal through 201I's Macarthur acquisition has allowed BTU to take advantage of steel producers' shift in coal blends. The company is a relatively low cost producer in the PRB. Its PRB and Illinois Basin operations should begin to see prices rise given greater year-over-year coal usage following an increase in natural gas prices. Finally, in our opinion, the company's trading operations and JV relationships provide it with the industry's best coal knowledge, allowing it to stay ahead of market movements. BTU Relative Value TkkethCou Maturity Price TM STW BTU BaIBB+ 6.500% 2020 107.25 5.31% BTU BaIBB+ 6.250% 2021 100 25 5.82% 389 CLD BUBB- 8.500% 2019 109.550 4.98% 475 CNX BUBB 8250% 2020 111.50 4.14% 391 CNX BIBB 6.375% 2021 104.75 5.42% 473 Somas: J.P. Morgan. Moody's, and S&P. 16 EFTA_R1_00539030 EFTA02029836 David Common. CM i1-212) 270-5260 clavid.commonfkpmorgan corn Overweight Moody's: 83; Outlook, N S&P: B-; Outlook, S Paper & Packaging Tarek Heraldic (1.212)834-5468 [email protected] Jon J. Mann (1-212) 830-7239 [email protected] J.P. Morgan Securities LLC MIALYS FOCUS \ LIST rt. North America Credit Research OR April 2013 Verso Paper (VRS) J.P.Morgan Buy VRS 11.375% Sr. Subordinated Notes due 2016 Offered at $58.00 (33.17%); Target: $80.00 (20.00%) Credit and Investment Highlights: • Verso is currently the second largest manufacturer of coated groundwood in North America with —21% market share and the third largest manufacturer of coated freesheet in North America with —12% market share. Verso was purchased by Apollo Management in 2006 and subsequently taken public through an IPO in May 2008. • On March 7th. Verso reported 4Q12 results. Reported EBITDA of $41 million compared to our estimate of $48 million and the consensus estimate of $44 million. Reported EBITDA results were OK at best, in our view, as strong volume and price performance were offset by higher-than-expected costs. However, insurance receipts boosted liquidity more than expected, and guidance and market commentary were constructive. Verso finished 4Q12 with $204 million of liquidity, up from $132 million at 3Q12. Note also that the company has announced a preliminary agreement for the sale of the remaining assets at Sartell and reiterated its expectation of finishing 2013 with over $200 million of liquidity. Why This Pick Should Outperform: • Following the Holdco PIK exchange, Verso has no debt maturities before the remaining stub subordinated notes mature in 2016. Additionally, the covenants in the company's new 11.75% 1.5 lien notes specifically prevent the company from utilizing its restricted payment capacity except for refinancing the subordinated notes. • The Subordinated Notes offer a current yield of 19.6% with a clear maturity runway and a solid liquidity profile. Verso finished 4Q12 with $204 million of liquidity, and we expect the sale of the Sartell site and hydro assets will provide an additional incremental boost to liquidity. We believe Verso will achieve management's expectations of finishing 2013 with over $200 million of liquidity. • Industry consolidation continues to seem inevitable over the longer term. Verso's rejected offer to acquire NewPage valued the company's first liens at over $80. NewPage's post-reorganization equity is now trading at the equivalent of below $40. We think it is highly unlikely that the valuation disconnect is allowed to persist and that some sort of industry consolidation will re-emerge in the near term. Ultimately, no matter how consolidation unfolds, taking out capacity should benefit pricing and margins long term and help this industry earn something resembling its cost of capital. VRS Relative Value Ticker Rating Coupon Maturity Price YTW $TW VRS Ban+ 11.75% 2019 109.25 9.29% 863 VRS 8119- 1135% 2019 82 16.72% 1.6051p VRS CeaVCCC 11.375% 2016 58 33.17% 3.285bp VRS CaaVCCC 8.75% 2019 47 27.51% 2.684tp SAPSJ 8.375% 2019 111 5.68% 5551ra Sons: J.P. Morgan. Moody's, and S&P. 177 EFTA_R1_00539031 EFTA02029837 David Comte,. CM (1.212)270.5260 david.commonfkpmorgan com Neutral Moody's: Bat; Outlook, N S&P: BB-; Outlook, S Retail Carla Casella"c (1.212) 270-6798 earla.easella©jpmorgan.com Paul A. Simenauer (1-212) 270-6861 [email protected] J.P. Morgan Securities LLC ANALYSI" FOCUS LIST North America Credit Research 09 April 2013 Toys R Us Inc. (TOY) J.P.Morgan Buy TOY 8.5% Secured Propco II Notes due 1-Dec-17 Offered at S106 (5.4%); Target: $108 (2.4%) YTC Credit and Investment Highlights: • Toys R Us is an international toy and baby-supply retailer with 875 stores across the US. 665 international stores and 163 licensed stores operating under the banners Toys R Us, Babies R Us. and FAO Schwarz. In addition to these stores, the company operates about 270 "pop up" stores around the holiday in smaller locations. The company's strategy over the past several years has been to combine certain Toys and Babies stores to better utilize space and even out store seasonality. Of its1.540 stores, 183 of its US stores and 170 of its international stores are the new side-by-side format; 252 stores remain purely Babies R Us. • TOY generated $13.5 billion of revenue, —$1 billion of EBITDA. and $251 million of free cash flow in the FY ended February 2, 2013. • TOY was bought by Bain, KKR, and Vornado in 2005 for 8.6x EBITDA, it filed an IPO registration in 2009, but withdrew that registration last month. Why This Pick Should Outperform • We are Neutral on the TOY credit, as the next three quarters are relatively insignificant for the company and with no IPO on the horizon, there is modestly greater dividend risk. It's 8.5% and 10.75% notes, however, are both secured at SPV property companies, and both are callable this year. We believe the 8.5s offer attractive yield for short-dated secured paper. The first call date is December I, 2013 (at 104.25), stepping down annually to maturity. The yield to the first call is near 5.5%, and increases with each subsequent call. We believe there are 2-3 points of upside for this to trade in line with other YTC bonds. • TOY is focused on improving gross margins and continuing its side-by-side store roll out, which should better lever its fixed cost structure in each store. This has improved cash flow over the past several years and allowed TOY to use some of its excess cash to begin paying down debt. It refinanced over $800 million of European debt in the past three months with $565 million of new debt, using excess cash to pay down the rest. We believe the company will do the same when it has the ability to call its Propco I bonds (10.75% callable in July). • While the market appears concerned about overall big-box toy retailing, we point out that TOY has performed well online (growing this business to over $1 billion today) and held its share in the market for toys. When we look at the composition of holiday sales, the company grew its sales of juvenile products (+9.8%, which we partly attribute to the side-by-side strategy) and learning toys (+1.2%). The entertainment category remains weak, owing to product lifecycles (-10.5%). and it decided to forego somc promotion on seasonal goods to preserve margin (seasonal - I 5.3%) TOY Relative Value Ticker Rating Coupon Maturity Nu rnv svw TOY (propeoll) 831458- 8.5% 2017 106 5.43% 530bp TOY (proem I) 83/B8- 10.75% 2017 107.5 2.4% 231bp BONT 10.625% 2017 100.785 0.587% 530P FNP 8243 10.5% 2019 112.375 3.1% 3000 RAD Caa2/CCC 9.5% 2017 105 -1.4% -146tp Sources' J P Morgan. Moody's. and S&P. 18 EFTA_R1_00539032 EFTA02029838 David Comte,. CM (1.212)270.5260 davicl.commonfkomorgan com Overweight Moody's: 62; Outlook, S S&P: B; Outlook, S Services Vilma AbobeAc (1-212) 270-3265 yilma.abobeajomorgan.com Ryan P. Dean (1-212) 270-9566 [email protected] J.P. Morgan Securities LLC ANALYST FOCUS \ LIST North America Credit Research 09 Apra 2013 Hertz Corp. (HTZ) J.P.Morgan Buy HTZ 5.875% Sr. Notes due 10/15/2020 Offered at 5105.00 (4.8%); Target: 5106.75 (4.5%) Credit and Investment Highlights: • Hertz is one of the world's leading car and equipment rental brands. Hertz Global operates one of the largest on-airport car rental companies in the United States and all major European markets. Pro forma for the Dollar Thrifty acquisition, Hertz and its independent licensees operate —10,300 car rental locations in 150 countries. In the equipment rental business, Hertz is one of top equipment rental companies in a fragmented industry with a 4% market share. The largest 100 North American rental companies make up only 30% of equipment rental industry. hertz operates through 315 equipment rental branches in the U.S., Canada, France, Spain, Italy, China and Saudi Arabia. • Positive fundamentals in both the car and equipment rental businesses. In the car rental business, volume was positive y/y throughout 2012. Pricing in the equipment renal business continues to be strong with volumes continuing to increase y/y. As a result of these factors, Hertz's corporate EBITDA improved 18% yiy, and margins expanded 140bps in 2012. • De-levering credit story. Our model shows HTZ net leverage of 2.6x at year end 2013 and ISx at year end 2014. Hertz's LTM PF net leverage is 3.3x. Why This Pick Should Outperform: • Margin expansion opportunity. The equipment rental business continues to report strong EBITDA growth. In the fourth quarter, it generated revenue and EBITDA growth for the eighth consecutive quarter and is still —30% below prior peak EBITDA. The equipment rental business, about 25% of EBITDA, should contribute to margin expansion in 2013. • Investment grade prospects. While it will likely be several years (2014 or 2015) before Hertz's credit profile can support investment grade ratings. we think a path to 1O should be visible by year end 2013. Over the next twelve months, we expect crossover investors to increasingly look at this credit. • Attractive on a relative value basis. We think Hertz credit profile today should support BB valuation. We think bonds look cheap relative to the J.P. Morgan BB index now at —4.4%. HTZ Relative Value Ticker Rating Coupon Maturity Price TTW 51W HT2 8243 5.815% 2020 105.000 4.83% 402bp CAR 62/B 8.250% 2019 110.500 4.10% 354bp URI 8343* 8.250% 2021 113.500 4A7% 415Igi Sources: J P. Morgan. Moody's, and S&P. 19 EFTA_R1_00539033 EFTA02029839 David Comte,. CM (1.212)270.5260 david.commonfkpmorgan com Overweight Moody's: B2; Outlook, S S&P: B; Outlook, S Technology Thomas Egan, CFA c (1-212) 270-2149 thomas.j.eganapmorgan.com Una Kahane, CFA (1-212) 834-5669 [email protected] J.P. Morgan Securities LLC ANALYS FOCUS \ LIST North America Credit Research 09 April 2013 iPayment (IPMT) J.P.Morgan Buy IPMT 10.25 `)/0 Sr. Notes due 2018 Offered at $93.25 (12.05%); Target: $96.00 (11.30%) Buy IPMT 15%/15% PIK Notes due 2018 (HoldCo) Offered at $76 (22.78%); Target: $80 (21.26%) Credit and Investment Highlights: • iPayment is a credit and debit card merchant acquirer focused on small merchants. The company's payment processing services enable merchants to accept credit cards, debit cards, checks, and gift cards as forms of payment for swipe transactions as well as card-not-present transactions that are conducted over the Internet or phone. Services provided by 'Payment include: transaction processing, risk management, fraud detection, merchant assistance and support and chargcback services related to disputes with cardholders. In December 2012, iPayment had 170k merchant accounts, with 118k active accounts. The company processed 522bn of volume in 2012. • iPayment's customer base consists of small merchants, which typically pay higher transaction fees than large merchants due to greater business risk, lower volumes, and difficulty in identifying them. Thus. iPayment can generate better margins by collecting the higher fees, while still receiving lower processing costs by aggregating small merchant transactions to receive larger volume discounts from their primary payment processor, First Data. Why These Picks Should Outperform: • Results for 4QI2 were fairly good. in our view, although we expect 1Q13 to be softer. The costs related to the embezzlement investigation were 512.1bn, and we do not believe the related SEC investigation will result in any significant discoveries beyond what the company has reported. The 'Payment, Inc. 10.25% notes due 2018 offer a yield of 12.05% and the iPayment Holdings I 5%/I 5% PIK notes due 2018 offer a yield of 22.78%. Given the company's competitive positioning, these yields, and likely industry consolidation, we remain positive on the name. IPMT Relative Value Ticker Rating Coupon Maturity Pries YIW STW IPMT BalCCO. 1025% 2018 93.25 12.05% 1.134tp IPMT Caa1 15%115% 2018 76 22.78% 2.2090p FDC Caa1/8- 12.625% 2021 108.125 10.89% 976bp TRUN Caa1/B- 9.625% 2018 109.50 4.97% 4560p Sources. J P Morgan. Moody's and S&P. 20 EFTA_R1_00539034 EFTA02029840 David Common. CM (1.212)270.5260 david.commonfkomorgan com Overweight Moody's: Bat; Outlook, S S&P: BB; Outlook, S Fitch: BB+; Outlook, S Telecommunications Thomas Egan. (1-212) 270-2149 [email protected] Lina Kabarta, CFA (1-212) 834-5889 [email protected] J.P. Morgan Securities LLC ANALYSI‘ FOCUS N LIST North America Credit Research 09 Aprd 2013 CenturyLink (CTL) J.P.Morgan Buy CTL 7.65% Sr. Notes due 2042 Offered at $97.25 (7.89%); Target: $99.75 (7.67%) Credit and Investment Highlights: • CenturyLink is a local exchange carrier and the third largest U.S. telecommunications company, providing integrated broadband, voice, wireless. managed hosting and cloud services. The company operates a 230k mile-long national fiber network, manages 55 data centers in North America, Europe, and Asia, providing collocation services and/or multi-tenant managed services. comprising about I.4mn square feet of sellable floor space, and offers advanced entertainment services under the Prism TV and DirecTV brands. CenturyLink also had 14,700 fiber to the tower builds as of the end of 2012. The company operates 13.7 million access lines in 37 states and has 5.85 million broadband subscribers and 1.9 million video customers (including both satellite and IPTV). • We believe CenturyLink is a better credit risk than peer companies such as Windstream and Frontier. The company has lower leverage and greater scale than either of those companies. and has diversified its business away from the declining revenues associated with consumer voice telephony. We think CenturyLink, with its predictable cash flows, could become the de facto benchmark 'BB' place to invest in high yield telecom. Why This Pick Should Outperform: • We believe CenturyLink's predictable cash flow will make the company's bonds a good place for portfolio managers to invest when seeking out bonds with a relatively low beta. CenturyLink was recently downgraded to below-investment grade status by all three rating agencies. The downgrades required that CenturyLink bonds be removed from investment grade bond indices and into high yield indices, which caused bonds to trade lower as investment grade index managers adjusted their portfolios. That trade now seems to have run its course. with the possible exception of CenturyLink long bonds, which still appear cheap to us as their longer duration tends to be avoided by many high yield investors. • For investors who can tolerate duration, we particularly like the long bonds of 2042, which offer yields of about 7.89%. If you worry about treasury moves, you can hedge that bond and get a spread of +500bps, which we believe represents a bargain. CTL Relative Value Ticker Rating Coupon Maturity Price YTW STY CTL Ba2188 7.65% 2042 97.25 7.89% 500to WIN Ba3/8 6.375% 2023 99.375 8.46% 460bp FTR Ba24313- 7.05% 2046 88.75 8.02% 513bp C88 8.375% 2020 104.75 7.32% 825to Sanas J P Mogan. Moody's. and S&P. 21 EFTA_R1_00539035 EFTA02029841 David Common. 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Hexion Specialty Chemicals, Inc.. Huntsman Corporation. Hovnanian Enterprises, Manitowoc Co.. New Gold, NewPage Corporation. Toys R Us. Hertz Global Holdings, Inc., iPayment, CenturyLink, Windstream, Frontier, AMR Corp. within the past 12 months. Company-Specific Disclosures: J.P. Morgan's Strategy. Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800477-0406 or e-mail i vsi:ircnclisslosnrc inquir icstrjpinotg.t:i corn. Explanation of Credit Research Ratings: Ratings System: J.P. Morgan uses the following sectonissucr portfolio weightings: Overweight (over the next three months, the recommended risk position is expected to outperform the relevant index, sector, or benchmark). 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Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to 23 EFTA_R1_00539037 EFTA02029843 David Common. CM f1.212)270.5260 david.common@)pmorgan.com North America Credit Research 09 Apra 2013 J.P.Morgan JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed. unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. 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