EFTA02702243

From: Barrett, Paul S Sent: Tuesday, October 2, 2012 5:22 PM To: 'Epstein, Jeffrey (jeevacation@qmaiLcomy Cc: Giuffrida, David J; Ens, Amanda Subject: To Do - Attachments: ipayment OW init.pdf Jeffrey =span style="font-size:11.0pt;font-family:"Calibri","san=-serir;color:elF497D">For Haze, we have $5MM in the JPM High Yield B=nd Fund. The SEC yield on that fund has come down to 5.60%. I think =e should sell $1.5MM of that position and: <=p> Buy $1MM of the Kindr=d Healthcare bond from yesterday (ytm 8.25%) =p class="MsoListParagraph" style="text-indent:-.25in;mso-list:I3 lev=ll Ifo7">-=nbsp; <=span>Buy $500K of the iPayment 10=2E25% 2018 (yield 12.70%) Let me know</=> Paul=o:p> </=> • =nbsp; iPayment, Inc. provides financial transaction processi=g services. 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. The Company offers credit=and debit card-based payment processing services, including, card authoriz=tion, data capture, settlement, merchant accounting, risk management= fraud detection, merchant assistance, support, and charge-back services=2E iPayment serves merchants throughout the United States. <=pan style="font-size:11.0ptfont-family:"Calibri","sans=serif""> • =OD The company focuses on =mall businesses, which results in a higher failure rate, but acquiring new=customers remains a priority and their business is very scalable =span style="font-size:11.0ptfont-family:"Courier New"">o =hey have 190,000 customers (130,000 of which are considered very active) EFTA_R1_02073991 EFTA02702243 o No single merchant accounts for >1% of their revenues=/span> <=pan style="font-size:11.0pt;font-family:"Courier New"">o H=gh margin business o High barriers to entry in this market th=t should offer some protection against competition =OD o=nbsp; For the fir=t half of 2012, the company processed 169.1M transactions for a total ch=rge volume of $11.3B. * &n=sp; irayment derives close to 90% of its revenues from the merchant discount fee=it charges to its customers for services. The fee is based on the size o= the transaction and is typically 2.8% for a credit card transacti=n, with some variation related to merchant type, card type, and in-person =ersus internet transaction. =/span> <=pan style="font-size:11.0pt;font-family:Symbol">. = Chairman/CEO owns 100% of the company — we like this =s he thus has a large vested interest to see the business succeed &n=sp; 7.0x leverage (th=s is fairly high — so the bonds are CCC+ and around a 12.7% yield)=0:p> We believe 'Payment's bonds offer very attractive =elative value, with the iPayment, Inc. 10.25% notes due 2018 offering = yield of - 12.7%. Given industry trends, the compa=y's competitive positioning, and these yields, we recommend these bonds=2E &=bsp; IPM= 10.25% 05/15/18 <=span>Cusip 46262EAE5 =OD • =nbsp; Senior Unsecured<=:p> * &nb=p; Rating: B3/CCC+ o This is their only bond (the others are =ay in Kind notes due Nov 2018) =/span>Please see the JPM Research attached &=bsp; 2 EFTA_R1_02073992 EFTA02702244 iPayment: Attractive Business with Strong Relative Value; Init=ating with Overweight We are initiating coverage of iPayment with an Overweight rating. The c=mpany is a leading merchant acquirer serving small businesses and ha= benefitted from increasing electronic payments by consumers. iPayment h=s generated higher margins given the challenging nature of the small busin=ss space. While attrition has been a concern, the company generally uses=excess cash flow to make acquisitions and maintain its portfolio.a:p> Targets small businesses. iPayment's custome= base consists of small merchants, which typically pay higher transaction=0D fees than large merchants due to greater business risk, lower volume=, and difficulty in identifying them. Thus, iPayment can generate better=margins by collecting the higher fees, while still receiving lower process=ng costs by aggregating small merchant transactions to receive large= volume discounts from their primary payment processor, First Data.=/o:p> A=quisitive focus. iPayment has typically used exc=ss cash flow to make acquisitions to grow its portfolio and mitigate =attrition, which can be meaningful given the higher failure rate in the sm=ll business market. We believe they have been successful with their acqu=sition strategy, having completed numerous transactions in recent years.=o:p> Unconventional ownership. Carl Grimstad, iPay=ent's Chairman and CEO, and his affiliations own all of iPayment Holding=. However, he also has a vested interest in ensuring the success o= the business and is likely to carefully consider how his potential action= may impact the company and his stake. Regulatory impact. Since the implementation of the Durbin legislation in Octobe= 2011, margins for processors and merchant acquirers have benefitted=from lower interchange fee expenses. However, as they continue to pass t=e savings onto more merchants, merchant discount fees will continue to dec=ine, closing the gap between the top-line and lower interchange expenses=2E Industry competition. There are a number o= companies looking to get into the payments business using new technology=0D including digital wallets, near field communications, and mobile car= readers. However, we believe there will be little in the way of change =or merchant acquirers such as iPayment in the medium term. Bottom line. We expect iPayment to contin=e to maintain its top line and generate healthy margins with total l=verage levels of —7.2x. Although the ownership structure is unconventi=nal, we believe the company has a good management team, focused on control=ing attrition and growing the portfolio with acquisitions. iPayment's =OA bonds offer very attractive relative value, with the iPayment, Inc. 1=.25% notes due 2018 offering a yield of 13.34% and the iPayment Holdin=s 15% PIK notes due 2018 offering a yield of 20.91%. Given industry tr=nds, the company's competitive positioning, and these yields, we r=commend that investors buy iPayment bonds. <=p> This mes=age has been prepared by personnel in one or more affiliates of JPMorgan C=ase & Co. and is not the product of JPMorgan's Research Department=2E It is not a research report and is not intended as such. =his material is for the general information of our clients and is a "=olicitation" only as that term is used within CFTC Rule 1.71 and 23=2E605 promulgated under the U.S. Commodity Exchange Act. =OA 3 EFTA_R1_02073993 EFTA02702245 =OA Paul Barrett, CFA Managing Director Gl=bal Investment Opportunities Group JPMorgan Private Bank 32= Park Avenue, 14th Floor, New York, NY 10022 NMLS ID# 853441 =OD =OD =/span> &=bsp; =OA This email is confidential and subject to important discla=mers and conditions including on offers for the purchase or sale of securi=ies, accuracy and completeness of information, viruses, confidentiality, l=gal privilege, and legal entity disclaimers, available at http://www.jpm=rgan.com/pages/disclosures/email. 4 EFTA_R1_02073994 EFTA02702246