J.P. Morgan

J.P. Morgan North America Credit Research 27 September 2012 •, Kindred Healthcare Initiating Credit Coverage with Overweight; Buy on the 8-1/4% Notes • Kindred Healthcare (KND) is one of the largest healthcare service providers, with LTM revenues of $6.1 billion. Two things have historically made it a difficult credit for many investors. First, about half of its revenues are obtained from long term acute care (LTAC) hospitals, the reimbursement of which Medicare has long suggested should change. Second, a sale-leaseback many years ago means KND has 'double leverage' via unusually high rents. • We think it's a good time to Overweight Kindred. Most importantly, it seems KND will not have to contend with any transformative changes to Medicare reimbursement for the next several years. Medicare took skilled nursing (SNF) payments down sharply a year ago, and it has delayed the 25% rule for LTACs an additional year to 2013, "pending results of an on-going research initiative to re-define the role of LTCHs in the Medicare program." Visibility of 2013 is reasonable, helped by preliminary guidance this month. FCF looks to be adequate, albeit sensitive to small changes in margins. • Management wants to increase the percent of assets it owns vs. leases. After some back and forth with Ventas, its largest landlord, KND now plans to let the leases lapse for 54 SNFs with annual revenues of approximately $550 million. These are generally older assets (average age of 41 years). Between below-average margins and capex required for upkeep the FCF impact of this shrinkage should be minimal. • KND 8-1/4% have underperformed since issued in May 2011. Bonds are a little below par while the market and single-Bs have tightened 40bps and 60bps, respectively. But now that we have anniversaried a full year of lower SNF payments and CMS has said it will review patient criteria, business risk seems much reduced. • We initiate credit coverage with an Ovenveight rating on Kindred and a Buy on the 8-1/4% unsecured notes. Table 1: KND Bond Market Data as of 26-Sap-12 Coupon Amt ISmr0 Description Maturity Rating Ma YTW STW Rae 5 250 . 3550.0 Sr Unsettred 1Jun•19 BNB- $98.00 8.65% 768bp Buy Source: J.P. Morgan and Bloomberg. Overweight Moody's: 81 Outlook: Stable S&P: 8+ Outlook: Stable The above ratings are at the corporate level Ticker KND Healthcare David Common, CFA AC Jared Feeney. CFA J.P. Morgan Securities LLC See page 10 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.morganmarkets.com EFTA01108670 David Common. CFA North America Credit Research 27 September 2012 Company Background J.P.Morgan Kindred Healthcare (KND) is a post acute care provider, with LTM revenues of $6.1 billion and Adjusted EBITDAR of $846 million. KND acquired RehabCare in June 2011 for $1.3 billion, and obtained 32 long term acute care hospitals, five inpatient rehabilitation facilities, approximately 1,200 rehabilitation therapy sites of service, and 102 hospital-based inpatient rehabilitation units. The company's strategy is focused on the development of cluster market service offerings across the U.S., providing care across the post acute care spectrum, from the highest acute (LTACs) to the lowest acute (home health). Today, KND has 15 cluster markets and has three potential cluster markets. Figure 1: KND Geographic Footprint and Cluster Markets • ••• ,:e- • .brok e . %. • C :'• . • • • • NE" • • • ;JAC Hoe/dais VIII • Inpatient R•habilitabOn Hospdais rei • Nursing and Rehabilitation Contins1224) ....1 . Moyne, Bawl Acme, roar) Units (1011 • RenabCaro Total tines of &nig 12.007 0 Eigeng Cluster Mark•I 110 • Henn Health ad ilegokoleal O /gondol Closter alakot (3) antSnsle X12 Source: Company reports. The company has five reportable segments, including the following: • Hospitals — Consists of the company's long-term acute care hospitals as well as its inpatient rehabilitation facilities. As of June 30, 2012, the company operated 118 LTAC hospitals and six IRFs in 26 states. In May, the company renewed (for 10 years) a lease (with Yentas) for 10 LTAC hospitals that was set to expire in April 2013. These LTACs generated $276 million in revenues for FY 2011. Revenues and EBITDAR (pre-corp) for the last 12 months were $2.9 billion and $573 million for this division. • Nursing Center (SNFs) — Consists of the company's transitional care, nursing and rehabilitation, and skilled nursing centers. As of Lune 30, 2012, the company operated 224 SNFs, and six assisted living facilities in 27 states. In February, the company decided not to renew leases for 54 of its SNFs, which generated approximately $550 million in revenues for FY 2011. The current lease expires in April 2013 (though the company has provided Yentas additional flexibility with accelerating the transfer of those assets to new operators). Revenues and EBITDAR (pre-corp) for the last 12 months were $2.2 billion and $294 million for this division. 2 EFTA01108671 David Common. CFA North America Credit Research 27 September 2012 J.P.Morgan • Rehabilitation (RehabCare) — Consists of the company's contract therapy services in hospitals and long-term care settings. Revenues and EBITDAR (pre- corp) for the last 12 months were $969 million and $142 million. • Home Health and Hospice (PeopleFirst) — Provides the aforementioned services from 52 locations in eight states under the "PeopleFirst" brand. The company has been keenly focused on expanding these capabilities. Revenues and EBITDAR (pre-corp) for the last 12 months were $99 million and $9 million. Figure 2: Revenue Mix Home Health & Hospice 1% Skilled Nursing Facilities 36% Source: Company moods. Rehabilitation 16% LTACH/IRF capitals 47% The hospital segment is higher-margined than the other segments, highlighting that LTAC business conditions are still the number one driver of results. Figure 3: EBITDAR (Pre-Corporate) Mix Rehabilitation 14% Home Health & Hospice 1% Skilled Nursing Facilities 29% Source: Company resod!. LTACFUIRF capitals 56% Over 60% of the company's revenues are exposed to government reimbursement, which has been under increased scrutiny (see Recent Credit Profile below). Note that the "Business-to-Business" payor below is from the company's rehabilitation division (contract therapy services). 3 EFTA01108672 David Common. CFA North America Credit Research 27 September 2012 Figure 4: Payor Mix Medicare 40% Source: Company reporis. Medicaid 16% J.P.Morgan usiness1o. Business 15% Commeraal Insurance/ Private 29% History - Separation from Ventas • 1985: Company was founded as Vencare Inc, an operator of LTACHs. • 1989: Company went public and changed its name to Vencor, Inc (based on its early focus on ventilator-dependent patients). • 1995: Vencor made a $1.6 billion acquisition to acquire Hillhaven Corporation, an operator of more than 300 SNFs. • 1997: Balanced Budget Act changes SNF reimbursement from cost-plus to a prospective payment schedule (PPS) leading to uncertainty in future margins. • 1998: Vencor split into two companies, in an attempt to unlock shareholder value by "REIT-ing" the company. Ventas, which took with it the real estate assets, became a REIT and Vencor become the operating company. • 1999: The decline in SNF payment rates exceeded management's expectations, and cost-save opportunities turned out to be lower. Vencor filed for Chapter 1 bankruptcy protection, but got about a 20% rent reduction from VTR to reflect the non-arm's length nature of the original lease arrangement. As part of the bankruptcy reorganization, Vencor changed its name to Kindred Healthcare. Recent Credit Profile CMS Rate Reduction for SNFs In July 2011, CMS announced the final SNF rates for FY 2012, an average 11.1% reduction for all SNFs. This rate correction was made to address the spike in reimbursement associated with the introduction of the RUGS-IV (Resource Utilization Groups Version 4) payment schedule. Under the new payment system, the government saw a significant increase in reimbursement, due to a shift in utilization among the therapy modes under the new RUGS-IV that differed significantly from CMS projections. As a result, CMS decided to implement a correction for fiscal 2012. Following the cut, KND appeared to have underestimated the impact over the course of several quarters, increasing the annual revenue impact estimate (to both its SNF and contract therapy businesses) from the midpoint of $102 million in August 2011 to $150 million in February 2012. 4 EFTA01108673 David Common. CFA North America Credit Research 27 September 2012 J.P.Morgan Despite underestimating the revenue headwind, it has been largely offset by cost savings. While management had first anticipated $55 million in synergies for 2012 associated with the RehabCare acquisition, the company has since realized $70 million through 2Q12. Further, the company expects to realize $50-$55 million in cost savings from SG&A reductions over the course of 2012. Management expects 4Q12 to be the first quarter where the full impact of the RehabCare synergies and the SG&A reductions will be evident. RehabCare Acquisition KND acquired RehabCare in June 2011 for $1.3 billion (about 8x pre-synergies EBITDA), and obtained 32 long term acute care hospitals, five inpatient rehabilitation facilities, approximately 1,200 rehabilitation therapy sites of service, and 102 hospital-based inpatient rehabilitation unites. As noted above, while management had first anticipated $55 million in synergies for 2012 associated with the RehabCare acquisition, the company has since realized $70 million through 2Q12. Future Credit Profile Acquisition Growth The company plans to "aggressively" expand home health and hospice services in its cluster markets, services that management sees as "higher-margin growth business." Today, the business is at about a $200 million run rate (post recent acquisitions including IntegraCare discussed below). As KND recently indicated, organic growth rates in home health and hospice are in the 6%-8% range, compared to 2%-3% in LTACHs, and about flat in SNFs. The higher growth rates, in conjunction with the company focused on delivering care across the post acute care continuum, will likely lead to significant expansion in home health and hospice, resulting in a change to the revenue mix in the future. KND expects to be able to grow the home health and hospice business organically (including de novos) by approximately 10% a year, with an additional $75-$100 million of growth per year via acquisitions. Earlier this month, KND acquired IntegraCare, a home health and hospice provider predominantly located in northern Texas, for $71 million (I .0x revenues) plus a possible $4 million cash earn-out. The company generates $71 million in revenues and EBITDA of approximately $9 million. Management expects additional organic growth opportunities through expansion into KND's existing Houston market. Paul Diaz indicated at a recent investor conference that he would like to make five more deals like IntegraCare over the next 18 months. LTACHs Get Relief In August, CMS announced the final rates for LTACHs, resulting in a +1.7% update for fiscal 2013. KND management indicated that the net effect (before sequestration) for the company will be a "slight" decline in reimbursement for its facilities. In any case, these rates and the one-year extension of the 25% rule appeared to positively surprise many investors, with KND's equity rising 19% on the day after the proposal in April. Earlier this year, MedPAC recommended no update in rates, with many investors fearing the possibility of CMS incorporating the full impact of budget neutrality (3.9% cut that was set to go into effect in calendar year 2013), and 5 EFTA01108674 David Common. CFA North America Credit Research 27 September 2012 J.P.Morgan the expiration of the very short stay outlier and 25% rule moratoria. Ultimately, the following is the final update for fiscal 2013: • 1.3% budget neutrality phase-in (3.75% over three years). • A payment reduction for very short stay outliers of 0.5%. • One-year extension of the 25% rule, 'pending results of an on-going research initiative to re-define the role of LTCHs in the Medicare program." The announcement of a 1.7% net increase for LTACHs is a win for the industry, as the outcome was arguably at least a 6% swing, from the context of what the rate could have been with the full impact of budget neutrality in place. Furthermore, the delay in the 25% rule is a positive for those with significant exposure to hospital-in- hospital (HIE) facilities, the full impact of which (while challenging to estimate given the number of assumptions) could be in the $50 million context for some of the H1H operators, but the impact to KND would likely be materially lower. It's also possible that the 25% rule could be eliminated in entirety. CMS states that it has delayed the rule "pending results of an on-going research initiative to re-define the role of LTCHs in the Medicare program." We believe that this research initiative is likely referring to patient criteria. Our sense was that industry-sponsored 'criteria' had been sufficiently diluted that they came nowhere near CBO's score of the cost to replace. But even if we don't know the details, the fact that CMS is considering this is a win in itself for the industry. As discussed at an investor presentation earlier this month, KND believes the criteria bill will score $500 million to $1 billion in savings. With the upcoming election taking center stage, we figured 'criteria' would only have an opportunity for inclusion in Congress's "lame duck" session. Real Estate — More Ownership, Less Leasing In recent years, KND has developed a greater interest in developing its asset base, reacquiring leased assets when compelling value propositions present themselves. As noted by management this month, the company has purchased previously leased real estate for approximately $76 million, which includes three LTACHs. Recently, management has addressed its view on acquiring real estate, which per the figure below, is the most expensive decision with respect to capital allocation. Given this and the other materially more accretive opportunities, we would expect the company to focus less on repurchasing its rented assets and continue to build out its franchises (especially home health and hospice; see low multiple and high EPS accretion; further discussed above). 6 EFTA01108675 David Common. CFA North America Credit Research 27 September 2012 Figure 5: KND's Capital Investment Opportunity Set I J.P.Morgan Ilamewsla I. Mapco Defies ITIVI*1 KNOW (0...11 I LIACMI Pleapsel Dow Natal Mixdb11.1484 a Pit ants. Marltet Acssieltles IbtotelPurchs I Delailadonlex 1224 10x Ompoimilitia/Develormat Mao", Nei a Renato. owl Nowa fixassle Is..smr Exforpfle• Vas* y 11111WARI Source: Company repcils. $0200 10. NO SO 090 $0. ss0 SO t20 SOW 10010 a. soap • web 50020 ""Co SNF Divestitures As mentioned above, in February, the company decided not to renew rental contracts for 54 of its SNFs, which generated approximately $550 million in revenues for FY 2011. The current contract for these facilities expires in April 2013 (though the company has provided Yentas additional flexibility with accelerating the transfer of those assets to new operators). 2013 Guidance Earlier this month, KND reaffirmed 2012 guidance and introduced preliminary guidance for 2013. Please see the guidance below: Table 2: KM) Guidance $mm (ex - EPS) 2012 2013 Updated Previous New Revenues 62 billion No change 5.9 Mien EBITDAR 868 to 884 No change 806 to 825 Rent 432 No change 389 DBA 201 No change 190 Interest Exp. 107 No change 110 EPS 1.35 to 1.55 per share No change 1.20 to 1.40 per share CF from Opt 260 to 280 240 to 260 230 to 250 Routine Capex 135 to 145 125 to 135 120 to 130 Discretionary FCF 85 to 90 No change 90 Source: Company repots. The guidance for 2013 assumes a reduction in revenues due to Medicare reimbursement rate reductions of $90-$100 million (due to LTACH budget neutrality phase-in and sequestration). We would expect sequestration and budget neutrality to result in revenue reductions of approximately $65 million and $30 million, respectively. Further, it assumes that the results of the 54 SNFs (whose rental agreements expire in April 2013 and are not being renewed) are classified as discontinued operations as of January I, 2013. 7 EFTA01108676 David Common. CFA North America Credit Research 27 September 2012 Kindred Healthcare, Inc. KND FINANCIAL SUMMARY ($ ten) Fiscal yesnend December Mon statement BY to Total revenues /tStmth S3bneS, AlgtS benefils Suptits Real Obit M6141/15 openses WpyrrerldWgeS Total Operating expense % Olsen (events Actual Ful Year EYE 20)9 I $4270 $2483 $333 $348 $886 $0 9(9% Adstsiod OMAR E1317/146 Mavis Y/Y [toot $578 115% Aqrated EBITDA ESIMA AtzuMt WY Groot 1229 54% AdjAntents EMMA EBITDA Manta Depreoalta sed antelainen EBIT Can Ibis) al doesbl.re operstom Loa antulate renCentrel El; tere-StS lemma (ass) attributable to Kindred Ovate ilass) kat CiSCCrlited o;erakes. net of name Net Mem* Bate Mures Atsts-fin2 ENT Lamp Net Intent Expense Otte EEO lyre Imes Mean ear rate bloat* from eating operations Banc EFS -naninurg Elleced shales outstanelng DAted EPS catering cps_ Cub love snatnis Net Income (toss) Delman:a and anteltakei Fronton la denbliel acccuols Otte Meting espial Cash low from optalira activities Maintenance Own E(scregonary ICE Dscretinlare Casex Free Caste Flow Anse Snow. aro Ovntettextei 8 $10 $126 $94 2% Ise) $16 $102 $39 35% $63 $1 0 23) 140 50 140 38 3 $105 385 5t,04 40 126 19 43 Is) 234 (102) 132 44) 88 Actual FW Yeae FYE 2010 Actual 1011 3141m-11 Actual 2011 30-An.11 Actual 3011 3040.11 Actual 4011 31-Deol 1 Actual Ft1 Yet FYE 2011 Actual 1012 3144a,.12 Aebal 2012 30-Ati.12 Estimate 3012 30-Se -12 Estimate 4012 31-Deol2 KILO 11.192 51283 $1314 11323 $5.512 11480 11.538 51423 51.562 21% 9.4% 1/5% 418% 3(2% 267% 325% 188% 26% 26% 52.K6 $679 $765 $901 $911 $3.255 $945 $907 $896 $501 $342 $80 $97 $108 $108 S 02 $111 $108 $107 $109 $357 $81 $96 $106 $107 I $ C Q $399 $108 $108 $107 $109 $919 $259 $287 $305 $313 11.164 $311 $313 $316 $323 SO $0 $0 $27 $103 $129 $1 $0 SO 50 14.154 11.120 11245 1140 11411 55.351 114711 11.436 11428 11.444 953% 919% 95.3% 954% 101.2% 969% 914% 915% 916% 924% $574 $171 $182 $211 1101 1761 $215 $219 DM $231 732% 114% 14.1% 119% 132% 138% 116% 1(3% 13.6% 14.8% -0.6% 17.8% 211% 70.9% 27.4% 332% 2Se% 206% .1.6% 152% $217 MO 118 $105 $94 1365 $107 $112 $161 $122 50% 67% 61% 69% 62% 66% 6.8% 7.3% 66% 7.8% -16% 318% MI% 2086% 40.9% 667% 319% 29.7% -(4% 29.5% $11 $7 $38 $37 $112 $151 $3 $12 $3 $3 12C6 $73 $68 018) $171 $104 $100 $98 $119 4.7% 6.7% 3.7% 4.5% 41% 31% 46% 45% 64% 7.6% $122 $33 $38 $47 $48 $49 $50 $49 551 144 $10 $10 $22 ($87) $5 $55 $50 148 $68 2% 3% 1% I% .4% 0% 3% 3% 3% 4% (57) $6) ($23) 026) 036) 081) 0 27) 027) (128) (s28 $13 53 $3 $3 $3 $12 $3 $3 $0 $0 $90 138 (110) RN 0 901 (63) $31 $28 $20 140 S34 $16 03) 02) 017) 0 7) $13 $11 $7 $14 MO% 0% 34% 163% 19% 11% 47% 41% 35% 35% $55 $22 (17) $1 0 73) 056) $19 $15 $13 $26 $1 ($o) $1 $1 $1 $3 $0 0 0) $0 50 (SO) 50 $0 $0 $0 50 $0 $0 $0 50 156 122 ($1) 12 0 72) 054) $19 $15 $13 $28 SO 50 $0 0 0) 30 50 (SD) $0 $0 $0 $56 $22 ($8) 12 0 73) ($53) $18 $16 $13 128 357 39.0 1-12 51.3 51.3 613 51.6 51.7 51.7 51.7 51 46 $057 0013) 9103 01401 (stio) 9115 $0.30 $025 $051 336 39.5 432 51.4 51.3 *62 51.6 51.7 51.7 51.7 51 46 $056 (91131 9103 01401 ($1.16) 9115 50.30 $025 $551 58 22 PI) 2 172) (SI) 19 15 13 26 172 33 38 47 48 168 49 50 49 51 24 6 8 8 13 7 8 7 7 33 2 (13) 27 115 2 (6) 6 6 (25) 1161 7 117) 159) (0) 113) 19 34 210 6 57 36 154 131 63 96 124 009) 101 125) 22 0 4) RN 137) 30 C38) 121 (133) 21 (( 12) (26) (29) 24 (45) 50 N5) 80 (513). 110 (14) 144) 118) (11) 112) 191 Nt 33 11 (43) 011 120) al t67 r62 1 11 12 71 J.P.Morgan Estimate FLI1 Yea, FYE 2012 16202 123% $1650 $436 $432 $1263 II 55382 922% 5873 14.7% 14.7% $111 7.1% 20.8% $22 $419 48% $199 $221 4% ($109) $6 $118 $45 35% $73 $0 $0 $73 iiso) $73 51.7 $1.41 51.7 41.41 p 73 193 18 9 (30) 260 (140) 118 (401 le Estimate FulYeae FYE Z113 Actual LTM 5/Jun12 $5,891 16.153 50% 3/.6% $1434 5.16131 $412 $435 3389 $428 $4257 $1.242 $0 $130 $1492 UV) 93.2% 95.9% $800 $846 73.6% 117% .63% 42.0% $411 1418 7.0% 6.8% .68% 741% $12 $185 $399 $253 6.8% d.1% $191 $194 $208 $80 d% 1% (51111 1$1051 50 $12 198 (134) $34 $4 35% •13% $63 0 311 $0 $2 $0 $0 163 0361 $0 ($0) $63 11361 52.7 51.7 $1.19 00.71) 52.7 51.7 $1.19 00.71) 63 1361 191 151 28 31 las 1451 prat 236 152 (125) (125) 111 27 1251 1851. 88 (581 EFTA01108677 North America Credit Research 27 September 2012 Kindred Healthcare, Inc. FINANCIAL SUMMARY IS mn) Ads Ads Actual Mewl Mewl Actuai rj Yea FyI Veer 1011 2011 3011 4011 Babno: shed data FvE 2339 EYE 2010 3188811 30%4811 30.Sea 31.008,1 ter011c(1148' tonditriti 516 —fir 5I9 $52 $42 Teal Sr See debt smiler SW Total OM $141 1141 1141 $361 $36, $36, $351 $351 $351 5590 $1,410 $1,410 $149 $1,499 $1,499 $899 $1541 $1541 SharcidesequN 5967 $1.011 11.058 $1.379 $1390 $1221 Total eneltalltation $1114 $1,357 $1,406 $2.019 RAU $2961 Net Elea $131 6118 5332 51.488 51,484 $1507 Credit Stallsecs 6131TDA, Item Carte alx 3056 2086 SIN 6.9x 456 ESITOA. 018E6:4101415.90ree 1066 5.6x 436 20. tax 186 Sena Seared DetnE811DA 0,36 1.7s. 156 3.31 216 2.76 ToNIORCERTOA 0.66 I ix 156 St 846 426 NN Do01581IDA 048 186 I46 52.• 4,36 416 ITU Irt840, OW R61 $2786 $2.1399 $28$4 $2.938 40/757 $3.191 P4P1014 $2934 53325 $3235 54.378 $8566 $4.743 1111E5M)A11 $578 $574 5500 $634 $721 $764 WOW DebItA4psied (OMAR Six 58a 546 6.9c 8.1c 826 Dsentcon FCF as% of beatdebt 892% 276% 432% 3.6% 25% 1.3% ToNIFOF as % Icra16,01 506% 91% 229% NM PSI NM Sena Seared Oterteap 13% 26% 25% 32% 33% 35% ROI NOUS 13% 26% 25% 51% 52% 54% NO DINGO 25% 24% 4 51% 53% &YU Oann a•Crann &nu CAPITALIZATION Is m1 Adult Aclual Adjusted PF Anal Adusted 3344+,12 Lc.eracte Lennie: f: ..41 12 Lawn* Lcnonge CM 138 518 5005 Nit dot 20161L4275) SSW $r.13 $705 TLO One 2018 (L1375.1.9%19 $693 5513 $1005m ROI Out 20188'375.150%M 59 51:0 Copia' lease odecizas $2 S2 Other $4 $4 &SO dal $1.101 29.6' 546' MAN 2.761 5.46' 8250%Sr Ms due 2019 $550 $510 Taal cleft $1164 OW CRC 11,656 4,0*' SAO Nettled 51616 3.961 S1.$0 Shrchddesequty $1,362 Teal eaplalltatMo 13.4014 San acit”....y Cur., Awl. ASSETCOVERAGE 1$ rrni Stock tree IUSEN 511,910010andrp2 Made, ream etl ccuty Gress &GI Ctil. EateraNse value ENYLTM BIWA EW2012E EIMIDA Sr Sec Elebte/ Total OattEV Sam $4*.nsuCaluavRicat, Meal F‘c Yew EYE 2011 2 $199 $1149 $1.549 $1,321 $2.669 $EW 274 4.24 41x 13194 SI,743 $764 tat 1.3% 144 35% 54% 53% J.P.Morgan Actual Actual Egoista Estimate fellmeee Estna% Ads 1012 2012 3012 •012 FYI Yes F‘4 Yea IN 314.4N.12 30.An.72 33.Set:2 31.0=42 FTC 9112 PIE 2013 30an.12 $40 $35 1 $151 1151 $129 11.114 11.104 $1,644 $1954 $UN $1,161 f1.106 $1154 $1.1•1 SUSI Wit 51.104 $1154 $1,644 $1954 $1,161 $1154 $1154 Iwo $1154 $1.337 $1,362 $1.38S 51.392 $ 1 485 5125 $1.112 $3101 UM 6 $3921 We $1.111 1711 $3.006 51.524 51418 $1575 $1303 $1503 1817 $1.816 31N 4.01 31. 4.04 80Y 3.76 006 171 288 24 244 241 23x 286 24 2/6 2.71 254 26 2.76 2.136 421 406 4136 ae. aei 496 486 4.16 394 3116 144 au 3.46 396 $3.326 $3.421 53.430 $3.452 $3452 510 $3.421 $4.930 $51775 $5.006 $5.105 $5103 $5.075 $036 $846 5812 $873 5873 $030 5846 62r 804 I3A, 514 696 80x )IA IS% 20% 71% SA% 18% VA 10.1 NV 54% $.4% 52% NM 37% 37% 37% 36% 15% 37% 56% 56% 56% Sr, 55% 4*/- 46% 54% LENIORY 0-4 ACTS 3: J.-n.12 Ceih $38 1850nnt AA due 20180./2751 $69) Gilt WV MOM LOWS 014 dedl fa Nei ROI. kat 5237 IAMA9111/ $275 Sem AN4sfenentantr Poe, ASSET COVERAGE Mate Arbusted1 DEBT AMORTIZATION SCHEDULE Current Canal 0 Nei 285.12 tf dn) 28140 2 $11.41 Stott dr* IIISDI $11.43 2012 51.7 Sha55 °want° 51.7 2013 2014 $591 MOM 4i.e &way MI 21316 $1,164 Red tre4e4 &MO) $3.421 21318 033) GrOtE MI $1954 Teereehlr $2207 each OA sem tuneonrOasury Ann Exarprlie 811o1 151174 — bap:wawa unsuckww, Six 506 EVLTIAESITINA 676 50% EVA0126 EBIOPR 64* 76% Sr See OabttEV SA TOW MIEN 10% Swat Alum atCoripar Row RANI 304.n.12 $4 ST ST $11 $411 $1212 9 EFTA01108678 David Common. CFA North America Credit Research 27 September 2012 Conflict of Interest J.P.Morgan This research contains the views, opinions and recommendations of J.P. Morgan research analysts. J.P. Morgan has adopted research conflict of interest policies, including prohibitions on non-research personnel influencing the content of research. Research analysts still may speak to J.P. Morgan trading desk personnel in formulating views, opinions and recommendations. Trading desks may trade, or have traded, as principal on the basis of the research analysts' views and research. Therefore, this research may not be independent from the proprietary interests of J.P. Morgan trading desks which may conflict with your interests. As a general matter, J.P. Morgan and/or its affiliates trade as principal in connection with making markets in fixed income securities discussed in research reports. 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Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised August 25, 2012. 11 EFTA01108680 David Common. CFA North America Credit Research 27 September 2012 J.P.Morgan Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. 12 EFTA01108681