From: Barrett, Paul S

From: Barrett, Paul S Sent: Monday, October 22, 2012 1:36 PM To: Epstein, Jeffrey ([email protected]) Cc: Giuffrida, David J; Schaffer, Susannah Subject: To Do - HY BOND IDEAS: EarthLink and Headwaters Jeffrey = think we should buy $1MM each of the following bonds:</=> =p class="MsoListParagraph" style="text-indent:-.25in;mso-list:I1 lev=11 Ifo5">1=2E &nb=p; EarthLink 8=2E875% 2019 ytw 7.94% 2. Headwaters 7.625% 2019 ytw 6.70% = fits into our housing recovery theme We have $18MM in cash right now. =OD Let me know. Paul =p class="MsoNormal"> EL=K 8.875 05/15/19 apan style="font-size:11.0p0ont-family:"Calibri","sans=serif"">Issuer: &=bsp; EARTHLINK INC Ticker:&nbs=; &=bsp; &nb=p; ELNK =OA Ratings: &n=sp; &n=sp; B2/B- Ranking: =nbsp; &nb=p; Senior Unsecured4=pan> EFTA_R1_00070971 EFTA01764035 Coupon: &nb=p; =nbsp; &nb=p; 8.875% &nb=p; <=o:p> Maturity: =nbsp; &nb=p; =nbsp; 05/15/19 Call Schedule: =nbsp; 05/15/15 @ $10=.438 &n=sp; &n=sp; &nbs=; 05/15/16 @ $102.219 =nbsp; &nb=p; =nbsp; &n=sp; 05/15/17 @ $100<=p> Price: &nbs=; &=bsp; &nb=p; $103.50 </=> YTW: &=bsp; &nbs=; =nbsp; 7.94% (05/15/17 @ 100.00) YTM: &n=sp; &=bsp; 8.17% (UST &#=3; 702bps) OAS Mod Duration: 3=2E82 =OD Issue Size: &n=sp; = 300mm Min Denom: &=bsp; &nb=p; 2k x 1k Cusip: &=bsp; &nbs=; =nbsp; 270321AC6 =OD =OA Company Background EarthLink, =nc. provides IT, network and communication services to individual and bu=iness consumers. The Company provides customers with managed IT se=vices including cloud computing, data centers, virtualization, secur=ty ,applications and support services. EarthLink also offers natio=wide data and voice IP services. Key Points =OA Strong credit metrics o =OD 2.2x Gross leverage /=1.3x net leverage § Peers are 3-4x levered o </=pan>400mm in liquidity (260mm of wh=ch is in cash) =OD o Good free cash flow 2 EFTA_R1_00070972 EFTA01764036 <= class="MsoListParagraph" style="margin-left:1.5in;text-indent:-.2=in;mso-list:I2 level31102"> LTM FCF of 81mm =OD - &n=sp; Relative Value o WPM Single B High Yield Index: 6.31% - pick up=163bps =0A° =I[endifj>.IPM Telecommunications High Yield Index: 5.68% &=8211; pick up 226bps - &nbs=; Good debt covenants o Earthlink cannot raise debt if leverage =xceeds 3.75x <=pan style="font-size:11.0pt;font-family:"Calibri","sans=serif"">- &nbs=; Declining consu=er side (specifically dial- up) is being addressed through pursuits of full=lT solutions on the business side o </=pan>This may cause higher leverage =n the future but as mentioned above there is a limitation to leverage righ= now based on covenants - 8slasp; Key ca=alyst for upside on these bonds: Refinancing of 10.5 ITC Deltacom notes-4D o ITC Deltacom subsidiary represents —31% of consolidated EBI=DA and 36% of total assets o </tpan>Right now, they cannot guarantee the 8=2E875 senior notes until its existing secured debt (ELNK 10.5 16) is ref=nanced o DB expects the call to happen in April 2013 as it seems th=y could refinance significantly cheaper <=>Risks: Greater than expected=decline in EBITDA from One Communications or the dial-up business, a= well as integration risk associated from future M&A deals we believe =he company may be pursuing. Call Schedule: &nb=p; =04/01/2015 @ $103.813 =span style="font-size:11.0pt;font-family:"Calibri","san=-serir"> =nbsp; &nb=p; = 04/01/2=16 @ $101.906 &n=sp; &=bsp; 04/01/2017 @ $1=0.000 P=ice: &nbs=; =nbsp; $103.5= YTW:&nbs=; &=bsp; &nb=p; 6.70%(0=/01/2017 @ 100.00) YTM: &=bsp; &nbs=; 6.94% (UST + 583bps) OAS Mod Duration: &n=sp; 3.86 =OA Issue =ize: &nbs=; &=bsp; 400mm 3 EFTA_R1_00070973 EFTA01764037 Min Denom: &n=sp; 2k x=lk Cusip: &nb=p; = 42210PA=5 &n=sp; Comp=ny Background Headwaters Incorporated is a manufacturer of building products=for new residential, residential remodeling, and commercial construc=ion. Headwaters' portfolio of light building products includes architectura= stone; resin-based exterior siding accessories, such as shutters, mountin= blocks and gable vents; concrete block and brick; and other building prod=cts. Key Points - &nb=p; Th=ee business segments: Light building Products (-51% of revenues), Heavy Co=struction Materials (47% of revenues), and Energy Technology (2% of revenu=s) =OD o % revenue based on Last Twelve Months=/o:p> =OD Good credit metrics o80mm in li=uidity of which 30mm is cash o = DB estimates 30mm FCF =ext year =OD o Only other debt they have are subordinate conver=ible bonds § —54mm due in 2014 and —49mm due in 2016<=p> Good play on our housing recovery theme</=:p> Relative value<=p> o JPM Sin=le B High Yield Index: 6.31% - pick up 39bps o JPM Ho=sing High Yield Index: 5.63%— pick up 107bps =u>Risks: Declines in new residential and nonresidential construc=ion spending. Also, raw material price changes and the ability to =ass those along could affect earnings. Finally an adverse ruling by the =PA classifying coal ash as a hazardous waste could result in concrete make=s choosing to use less or no coal ash in their ready-mixed concrete, which=would adversely affect HW's heavy construction materials segme=t. Sourc=: www.headwaters.com <http://www.headwaters.com> 4 EFTA_R1_00070974 EFTA01764038 Paul Barrett, CFA Managing Director Global Investment Opportunities Group</=:p> JPMorgan Private Bank 320 Park Avenue, 14th Floor, New York, NY 10=22 NMLS=ID# 853441 <=:p> =o:p> <=pan STYLE="color :#000000; font-size: 8pt; background -color :#FFFFFF">=0D This email is confidential and subject to important disclaimers and c=nditions including on offers for the purchase or sale of securities, accur=cy and completeness of information, viruses, confidentiality, legal privil=ge, and legal entity disclaimers, available at http://www.jpmorgan.com=pages/disclosures/email. 5 EFTA_R1_00070975 EFTA01764039