EFTA02029821.pdf

J.P. Morgan North America Credit Research 09 Aphl 2013 U.S. High Yield Credit Analyst Focus List 2Q13 U.S. High Yield Credit Research David Common, CFA AC (1-212)270.5260 dmad common@ipmorgan corn .1P Morgan Secunthm LLC 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 This quarterly roundup is a complete refresh; ideas not carried over and presented again are considered superseded by new ideas.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intra-quarter where a valuation target has been largely or wholly achieved or the original rationale is considered no longer valid.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. 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 EFTA_R1_00539015 EFTA02029821 David Common. CM North America Credit Research t1.212)270.5260 09 Aprit 2013 J.P.Morgan 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 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 Momentwe Performance Morena's MOMENT Chemicals Buy MOMENT 9.0% 2nd Lien Notes due 2021 Tarok Hamid 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 North America Credit Research 09 Apri 2013 J.P.Morgan clavid.common©Jpmorgan com AMR Corp. (AMR) Overweight Buy AMR 7.0% B-Tranche 11-1 EETCs Moody's: B1 (31-Jan-18 maturity, 8-Feb-17 AL) S&P: B+ Offered at $106.125 (5.19% yield); Target: $108.5 (4.52% yield) Airlines Credit and Investment Highlights: Mark Streeter' • AMR Corporation is the parent company of American Airlines, one of the (1-212) 834-5086 mark.streeterOpmorgan.com world's largest international airlines. On 29-Nov-II. 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 Jonathan Rau (1-212) 834-5237 merger. Final Doi and DoT approvals are expected later this year. We expect an jonathan.d.rau©Ipmorgan.00rn 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, J.P. Morgan Securities LLC 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 ANALYST` 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%. FOCUS Why This Pick Should Outperform: \ LIST • 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 tt. 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 North America Credit Research OR April 2013 J.P.Morgan clavid.commonfkpmorgan com Dana Holding Corp. (DAN) Overweight Buy DAN 6.75% Sr. Notes due 2021 Moody's: B2: Outlook. S S&P: BB; Outlook, P Offer: $110.00 (4.1% YTW, 380bp STW) Target: $112.00 (3.4% YTW, 311bp STW) Automotive Credit and Investment Highlights: Eric J. Seale' 1-212-270-9624 • Over the past four years. Dana has lowered leverage by 2.3x (despite acquiring [email protected] controlling stakes in two of its JVs) via EBITDA growth, stock issuance, asset sales and free cash flow generation. Yao Li • Despite guiding to a 2% decline in sales, Dana expects FY13 EBITDA to grow 1.212-270-9455 [email protected] 3% and free cash flow to total $250mm. Why This Pick Should Outperform: J.P. Morgan Securities LLC • 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. ANIILYS • 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), FOCUS 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. \ LIST • 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 North America Credit Research 1-212) 270-5260 00 April 2013 J.P.Morgan clavxd.commonapmorgan cum Jaguar Land Rover (TTMTIN) Underweight Sell TTMTIN 5.625% Sr. Notes due 2023 Moody's: Ba3: Outlook. S SW: BB-: Outlook, P Offer: 5105.875 (4.7% YTW, 342bp STW) Fitch: BB-: Outlook, S Target: $97.25 (6.0% YTW, 430bp STW) Credit and Investment Highlights: Automotive • Jaguar Land Rover (JLR) designs, develops, manufactures and sells premium Erie J. Salle` sports sedans and sports cars (Jaguar brand) and premium all-terrain vehicles 1.212.270-9624 [email protected] (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 Yao Li development costs and mix degradation. After £0.2bn of YTD cash bum, JLR 1-212-270-9455 ended 3Q12 with net debt of negative £0.3bn. At Dec. 2012, the company had Yao.Lifajpmoroan.00m cash of £2.1bn and undrawn committed facilities of £1.0bn. Why This Pick Should Underperform: J.P. Morgan Securities LLC • 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 ANALYS 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, FOCUS 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 \ LIST 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% 'k , 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 North America Credit Research J.P.Morgan I 1-212) 270-5260 09 Aprit 2013 david.commonfkpmorgan com WideOpenWest (WOWFINFIN) Overweight Buy WOWFINFIN 13 3/8s '19 @ $113.75, 9.95% ytm Moody's: B2; Outlook, S S&P: B; Outlook, S Credit and Investment Highlights: • Financial results for WideOpenWest have been generally in line with our Cable/Satellite expectations. Unit adds have been slightly below our estimates, as we suspect chum remains elevated in acquired Knology markets, but reported revenue and Michael Pantie (1-212) 270-6530 adjusted EBITDA growth has been in line (+4% to +5% y/y). We expect similar Michaelpace(g)jumorgan.com 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, Maxx Kauffman progress on Knology integration, etc.). We continue to model full-year revenues, (1-212) 270-6797 reported adjusted EBITDA, and capex of —51.25bn (+4%), —5452mn (+8%), and Maxx.d.kautImanajpmorgan.com 5230mn, respectively. J.P. Morgan Securities LLC • 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. ANALYST' • We expect leverage to improve during 2013. At year-end 2012, total net FOCUS 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. \ UST 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 JP 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  North America Credit Research David Common. CM 1-212) 270-5260 09 April 2013 J.P.Morgan clavicl.commonfkomorgan com Momentive Performance Materials (MOMENT) Overweight Buy MOMENT 9.0% 2nd Lien Notes due 2021 Moody's: Gael; Outlook, S Offered at $77.50 (13.81%); Target $94.66 (10.0%) S&P: CCC; Outlook, N Credit and Investment Highlights: Chemicals • Momentive Performance Materials is a former subsidiary of General Electric that Tarek Remit was purchased by Apollo Management and its affiliates via a leveraged buyout in (1-212) 834-5468 December 2006. The company is the world's second largest producer of silicones Tarek.x.hamid©jpmorgan.com and silicone derivatives and is a global leader in products derived from quartz and specialty ceramics. Jon J. Mann (1-212) 834-7239 • On April 1st, Momentive reported in-line 4Q12 results. Segment EBITDA of $50 Jonathantinannapmorgan.com 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 J.P. Morgan Securities LLC 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: ANALYS • The company began to comp positively on EBITDA in 4Q12 as the silicones industry continues to grow into capacity. Leverage remains highly elevated; FOCUS however, we do not believe anything is fundamentally broken in the Momentive business model. Modest volume growth and fixed cost absorption are the focus \ UST 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. JP Morgan. Moody's. and S&P. EFTA_R1_00539021 EFTA02029827 David Common. CM North America Credit Research i1-212) 270-5260 00 April 2013 J.P.Morgan clavid.common©Jpmorgan com Tronox (TROX) Underweight Sell TROX 6.375% Senior Unsecured Notes due 2020 Moody's: Ba3; Outlook, S Bid at $96.50 (6.99%); Target: $91.09 (8.00%) S&P: BB; Outlook, S Credit and Investment Highlights: Chemicals • Tronox is the fifth largest global producer of both titanium dioxide and titanium Tarek Hamicec feedstocks. Titanium dioxide has an unparalleled ability to impart the color white (1-212) 834-6468 and is very difficult to substitute in painting and dying applications. The TiO2 Tarek.x.hamid©jpmorgan.com industry has all the hallmarks of a very profitable commodity, with growing demand, low threat of substitution, and a high concentration of market share Jon J. Mann among a few participants. However, with the exception of a few brief moments of (1-212) 834-7239 Jonathantinannapmorgan.com success, the industry has generally disappointed. • On February 2Ist Tronox reported disappointing 4Q12 results. Reported J.P. Morgan Securities LLC 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: ANALIIS • The profitability of the pigments and mineral sands industries are highly FOCUS dependant on operating rates given their commoditized nature. Softening demand from European and Asian construction markets, highly elevated inventories and \ LIST 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 North America Credit Research J.P.Morgan (1.212)270.5260 09 Apra 2013 clavid.common©Jpmorgan com Edgen Murray Corp. (EDG) Overweight Buy EDG 8.75% Sr. Secured Notes due 2020 Moody's: Caal; Stable Offered at 5105 (7.63%); Target: 5108 (7.00%) S&P: 8+, Stable Credit and Investment Highlights: High Yield Energy • Edgen Group is a global distributor of steel products primarily to the energy, Gregg Brody mining, power, petrochemical and civil construction markets. Edgen offers a (1-212) 834-5997 broad product catalog of more than 14,000 specialty products and maintains Gregg.w.brody©jpmorgan.00m 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 J.P. Morgan Securities LLC 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 AtIALYS" over year. The company recently provided 2013 revenue guidance of $2.0-$2.2 FOCUS 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 \ LIST 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 EDG Relative Value 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 North America Credit Research i1-212) 270-5260 OR April 2013 J.P.Morgan david.commonfkpmorgan com Mohegan Gaming Authority (TRIBAL) Overweight Buy TRIBAL 3rd liens due '12/16. Moody's: Caal; Outlook, S Offered at $98.750 (10.911%); Target: $101.00 S&P: B-; Outlook, S Credit and Investment Highlights: Gaming • Mohegan is the largest tribal casino operator in the U.S., with its flagship Susan Berliner 4 property being Mohegan Sun in CT. while it also owns Mohegan Sun at Pocono (1-212) 270-3085 Downs in PA (located on commercial land). Unlike most tribal credits, TRIBAL susan.bediner@jomorge n.corn 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 Richard DeGaetani (1-212) 834-9524 investment made in A.C. (Resorts) and a management contract in place. TRIBAL richard.j.clegeetandgijpmorgan.com 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. J.P. Morgan Securities LLC • 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 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. \ LIST • Focused on Debt Reduction/Refinancing. We believe management is already focused on refinancing its entire capital structure, as its Revolver & TL-A mature in let '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