Ideas

December 13, 2011
High Yield
2012 High Yield Credit Outlook & Best Ideas

Better value in higher quality
Quality gap to widen as US growth slows
The outperformance of BB-rated corporate balance sheets relative to the rest of the high yield market has been impressive since the economy emerged from recession in mid-2009. Credit metrics for BB-rated firms have largely reverted to pre-crisis strengths and are now at their best levels in 25 years. By contrast, lower rated firms, particularly in the CCC bucket, are still struggling to deleverage and repair their balance sheets. Our view is that BB-rated credits are well positioned to resist a prolonged period of weak growth and even a modest recession without causing a sharp increase in defaults. For lower rated issuers, the prospect of sluggish growth next year will likely translate into more balance sheet pressure. Mainly for this reason, we expect a modest increase in high yield defaults to 4.8% by the end of 2012 from roughly 2% today. This forecast is roughly equal to the long-run average of the past 22 years but significantly below the peaks of the past three cycles. Coverage views
Credit Research
Attractive Energy Neutral Airlines Auto Suppliers Autos Cable, Satellite & Towers Commodity Chemicals Consumer & Apparel Gaming, Lodging & Leisure Healthcare Pharma/Med Devices Cautious Building Materials Food & Beverage Healthcare Providers Paper & Forest Products Rental Services Shipping Homebuilders Metals & Mining Restaurants Retail Specialty Chemicals Technology Telecom Utilities & Power Packaging & Containers
Picks & Pans

Picks Apria Healthcare Beazer Homes USA, Inc. Berry Plastics Corporation Burlington Coat Factory Cablevision Systems Corp. Caesars Ent. Operating Co. CF Industries Inc. Energy XXI Gulf Coast Inc. Ford Motor Company Ford Motor Credit Company Fortescue Metals Group Limited GenOn Energy Inc. Leap Wireless International, Inc. Meritor Inc. Mohawk Industries, Inc. Navios Maritime Holdings Inc. Novelis, Inc. Reynolds Group Holdings Limited Rite Aid Corp. Tenet Healthcare Pans Avis Budget Group, Inc. AES Corp. Dean Foods Company Endo Pharmaceutical Frontier Communications Corp. Goodyear Tire & Rubber Co. James River Coal Company KB Home Louisiana-Pacific Corporation Olin Corporation Overseas Shipholding Group, Inc. Pinnacle Entertainment, Inc. Tesoro Corporation US Steel Corporation USG Corporation
Short-term risk from Europe still looms: Play defense

The current premium embedded in high yield bonds is not remotely close to the peaks reached in the aftermath of the Lehman default. But when benchmarked to the 2001/2002 recession, BB- and B-rated bonds appear to offer good value while the premium embedded in CCC-rated bonds is still low. Despite the attractiveness of the premium for the high end of the market, at least on a buy and hold basis, we do not expect sustained compression anytime soon. On a relative basis, we would overweight BBrated bonds vs. lower rated bonds, rotate to undervalued defensive sectors, and finally reduce spread duration risk.
Contributing authors
Erin Blum Kevin Coyne Karen Eltrich Justine Fisher Jason Gilbert Brian Jacoby, CFA Franklin Jarman Jason Kim Carly Mattson Kristen McDuffy Raymond M. Leung Joseph Stivaletti
Coverage views
We are Attractive on energy and packaging & containers, a view that underlines attractive valuation in these sectors. We are Cautious on building materials, food and beverage, healthcare providers, paper & forest products, rental services, and shipping.
Global Investment Research (212) 902-1000 Charles P. Himmelberg (917) 343-3218 charles.himmelberg@gs.com Goldman, Sachs & Co. Erin Blum (212) 855-7718 erin.blum@gs.com Goldman, Sachs & Co. Kevin Coyne (212) 357-9918 kevin.coyne@gs.com Goldman, Sachs & Co.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. This research discusses Rule 144a securities, which generally are available only to Qualified Institutional Buyers.
The Goldman Sachs Group, Inc.
Global Investment Research
December 13, 2011
High Yield
Table of contents
Coverage Views and Picks & Pans ........................................................................................................... 4 Credit Strategy: Short-term risks loom large: Play defense .................................................................... 5 Autos & Auto Suppliers: Coverage view and recommendations............................................................ 12 Ford Motor Co. and Ford Motor Credit ................................................................................................................. 14 Meritor .................................................................................................................................................................... 17 The Goodyear Tire & Rubber Co. .......................................................................................................................... 20 Building Materials: Coverage view and recommendations..................................................................... 23 Mohawk Industries, Inc. ......................................................................................................................................... 27 USG Corporation ................................................................................................................................................... 29 Cable, Satellite & Towers: Coverage view and recommendations ......................................................... 31 Cablevision Systems Corp. .................................................................................................................................. 32 Chemicals: Coverage view and recommendations ................................................................................. 36 CF Industries Inc...................................................................................................................................................... 38 Olin Corporation ..................................................................................................................................................... 42 Consumer & Apparel: Coverage view and recommendations ................................................................ 45 Energy: Coverage view and recommendations....................................................................................... 46 Energy XXI Gulf Coast Inc. .................................................................................................................................... 47 Tesoro Corporation ................................................................................................................................................ 49 Food & Beverage: Coverage view and recommendations ...................................................................... 51 Dean Foods Company ........................................................................................................................................... 52 Gaming, Lodging & Leisure: Coverage view and recommendations ...................................................... 54 Caesars Entertainment Operating Company ....................................................................................................... 55 Pinnacle Entertainment, Inc. ................................................................................................................................. 58 Healthcare: Coverage view and recommendations ................................................................................ 61 Apria Healthcare ................................................................................................................................................... 61 Tenet Healthcare Corp. .......................................................................................................................................... 64 Endo Pharmaceutical ............................................................................................................................................. 69 Homebuilders: Coverage view and recommendations............................................................................ 73 Beazer Homes USA, Inc. ........................................................................................................................................ 74 KB Home ................................................................................................................................................................. 78 Metals & Mining: Coverage view and recommendations ....................................................................... 83 Fortescue Metals Group Ltd. ................................................................................................................................. 88 Novelis, Inc. ............................................................................................................................................................ 91 James River Coal Company .................................................................................................................................. 94 US Steel Corporation ............................................................................................................................................ 96 Packaging & Containers: Coverage view and recommendations ........................................................... 98 Berry Plastics Corporation ..................................................................................................................................... 99 Reynolds Group Holdings Limited ..................................................................................................................... 100
Goldman Sachs Credit Research 2
December 13, 2011
High Yield
Paper & Forest Products: Coverage view and recommendations ........................................................ 103 Louisiana-Pacific Corporation ............................................................................................................................. 103 Rental Services: Coverage view and recommendations ....................................................................... 105 Avis Budget Group, Inc........................................................................................................................................ 106 Retail: Coverage view and recommendations ...................................................................................... 109 Burlington Coat Factory ....................................................................................................................................... 110 Rite Aid Corp. ....................................................................................................................................................... 112 Technology: Coverage view and recommendations ............................................................................. 114 First Data Corporation. ......................................................................................................................................... 115 Alcatel-Lucent ....................................................................................................................................................... 119 Telecom: Coverage view and recommendations .................................................................................. 122 Leap Wireless International, Inc. ......................................................................................................................... 123 Frontier Communications Corp. ......................................................................................................................... 127 Transportation: Airlines: Coverage view and recommendations ......................................................... 130 Lessors .................................................................................................................................................................. 132 Post-2009 B tranches ........................................................................................................................................... 133 Routes/Slots deals ............................................................................................................................................... 134 Transportation: Shipping: Coverage view and recommendations ....................................................... 135 Navios Maritime Holdings Inc. ............................................................................................................................ 142 Overseas Shipholding Group, Inc. ...................................................................................................................... 145 Utilities & Power: Coverage view and recommendations ................................................................... 147 GenOn Energy, Inc. .............................................................................................................................................. 150 AES Corp. ............................................................................................................................................................. 151
Goldman Sachs Credit Research
December 13, 2011
High Yield
Coverage Views and Picks & Pans

Industry Autos Brian Jacoby Auto Suppliers Franklin Jarman Building Materials Carly Mattson Cable, Satellite & Towers Jason Kim Commodity Chemicals/Specialty Chemicals Kristen McDuffy Consumer & Apparel Kevin Coyne Energy Jason Gilbert Food & Beverage/Restaurants Karen Eltrich Gaming, Lodging & Leisure Kevin Coyne Healthcare Providers/Pharma & Med Devices Erin Blum Homebuilders Kristen McDuffy Metals & Mining Justine Fisher Packaging & Containers Joseph Stivaletti Paper & Forest Products Joseph Stivaletti Rental Services Franklin Jarman Retail Karen Eltrich Technology Franklin Jarman Telecom Jason Kim Transportation: Airlines Justine Fisher Transportation: Shipping Justine Fisher Utilities & Power Raymond Leung Coverage View Neutral Picks Ford Motor Company Ford Motor Credit Company Meritor Inc. The Goodyear Tire & Rubber Co. Pans
Neutral
Cautious Neutral
Mohawk Industries, Inc. Cablevision Systems Corp.
USG Corporation
Neutral/Neutral Neutral
CF Industries Inc.
Olin Corporation
Attractive
Energy XXI Gulf Coast Inc.
Tesoro Corporation
Cautious/Neutral Neutral
Dean Foods Company Caesars Ent. Operating Co. Pinnacle Entertainment, Inc.
Cautious/Neutral
Apria Healthcare Tenet Healthcare Corp. Beazer Homes USA, Inc.
Endo Pharmaceutical
Neutral
KB Home
Neutral
Fortescue Metals Group Limited Novelis, Inc.
James River Coal Company US Steel Corporation
Attractive
Berry Plastics Corporation Reynolds Group Holdings Limited Louisiana-Pacific Corporation
Cautious
Cautious Neutral
Avis Budget Group, Inc. Burlington Coat Factory Rite Aid Corp.
Neutral
Neutral Neutral
Leap Wireless International, Inc. Lessors Post-2009 B tranches
Frontier Communications Corp. Routes/Slots deals
Cautious Neutral
Navios Maritime Holdings Inc. GenOn Energy, Inc.
Overseas Shipholding Group, Inc. AES Corp.
December 13, 2011
High Yield
Credit Strategy: Short-term risks loom large: Play defense

Charles Himmelberg Goldman, Sachs & Co. charles.himmelberg@gs.com 1-917-343-3218 Lotfi Karoui Goldman, Sachs & Co. lotfi.karoui@gs.com 1-917-343-1548 Annie Chu Goldman, Sachs & Co. annie.chu@gs.com 1-212-357-5522 We are directionally negative on US credit spreads, including high yield. We think another round of escalating concerns on the European debt crisis combined with softer US growth in the first half of 2012 will prevent any sustained rally. In particular, the prospect of sluggish growth next year means continued headwinds for lower rated issuers, hence we expect the current divergence between high- vs. low-rated credits to persist if not increase. While credit metrics for BB-rated firms have largely reverted to pre-crisis strengths, lower rated firms, particularly in the CCC bucket, are still struggling to deleverage. Mainly for this reason, we project a modest increase in HY defaults to 4.8% by the end of next year from roughly 2% today. We recommend that investors move up in quality in the BB space and overweight defensive sectors over cyclical ones. High yield bonds have posted a total return of 3% year to date, but this return was largely due to carry and to a lesser extent the rally in Treasuries. Spreads are now broadly wider than they were at the beginning of the year, and we do not expect any sustained tightening going into next year. We turned cautious in June as the first signs of escalating European debt crisis and softening growth outlook started to emerge. At the time, we focused on the escalation of the Eurozone sovereign crisis and slowing growth in Europe as mutually reinforcing dynamics. We think this framework still applies and therefore maintain our negative stance on spreads. Our view is that the strength of corporate balance sheets (especially for the high end of the HY market) and search for yield motives will likely remain overwhelmed by weaker macro fundamentals and escalating concerns on the European debt crisis.
Slowing growth expected to exacerbate the credit quality gap between BBs and lower rated credits. Our macro forecasts call for a weaker global growth environment. We
are most negative on the Eurozone where we expect a recession with a decline in real GDP of 0.8% in 2012 followed by a modest expansion of 0.7% in 2013. In the US, our central case is for real GDP growth to slow to 0.5% in the first quarter of 2012 and stabilize in the vicinity of 1.5% by the end of the year. Unlike in Europe, we do not think the US economy will enter a recession next year. But the risks to our global forecasts are all on the downside, mainly because of the elevated risk that policy fails to short-circuit the negative feedback loops in Europe amid austerity, recession, and elevated pricing of sovereign risk. In such an environment, we think global growth and the global price of risk will pressure credits, especially at the low end of the HY market. As shown by Exhibit 1, the outperformance of BB-rated corporate balance sheets relative to the rest of the HY market has been impressive since the economy emerged from recession in mid 2009. Coming into the 2008 crisis, balance sheets were already unusually strong for BB-rated firms relative to the overleveraged lower-rated ones. Following a slight deterioration in 2008 and early 2009, BB balance sheets have since had an impressive run. For example, the median debt-to-EBITDA ratio for BB-rated firms has dropped to 2.3x from 2.7x and is now at its lowest in 25 years. By contrast, lower rated firms have struggled to improve their credit metrics, with the median debt-to-EBITDA ratio remaining stubbornly high at 3.9x (again see Exhibit 1). The underperformance of B- and lower rated balance sheets is by and large a legacy of the 2005-2007 LBO wave, which resulted in an overleveraged tail of companies in the HY universe. Our view is that the credit quality gap between the high end and the low end of the HY market is likely to persist, if not deepen. We also think BB-rated credits are well positioned to resist a prolonged period of weak growth and even a modest recession without causing a sharp increase in defaults.
December 13, 2011
High Yield
Exhibit 1: High-quality high yield credits have improved much more than low-quality
The plot shows the de-seasonalized median total debt to EBITDA ratio for North American nonfinancial firms that are rated by S&P
5.0 4.5 4.0 3.5 3.0 2.5 2.0 BB B and lower
1987Q2
1989Q2
1991Q2
1993Q2
1995Q2
1997Q2
1999Q2
2001Q2
2003Q2
2005Q2
2007Q2
2009Q2
Source: Goldman Sachs Credit Strategy, Compustat.
We expect a modest increase in defaults in 2012, mostly concentrated among CCCrated issuers. Despite having suffered the worst recession since the Great Depression, HY
default rates have been remarkably low over this cycle. Looking into 2012, we expect a modest increase in 12-month cumulative HY defaults to 4.8% by the end of 2012 from roughly 2% today. This forecast is roughly equal to the long-run average of the past 22 years. We also expect the vast majority of these defaults to materialize in the CCC bucket. Our view also remains benign for longer horizons. Our five-year cumulative loss rate estimates are generally below the peaks of the 2001/2002 recession even under a pessimistic scenario of a long recession. We estimate the five-year cumulative loss rate for BB- and B- rate issuers will reach 3.1% and 8.1%, respectively. These are significantly below their respective estimated peaks of 6.5% and 21.2% in past cycles. For CCC-rated issuers, we forecast a five-year cumulative loss rate of 33.2%, which is still better than in the 2001/2002 recession.
The Credit Risk Premium is attractive for the high end of the market, but short-term risk looms large. The current premium embedded in HY bonds is far from the peaks
reached in the aftermath of the Lehman default. When benchmarked to the 2001/2002 recession, however, BB- and B-rated bonds appear to offer reasonable value (although mark-to-market risk implies ambiguous Sharpe ratios). By contrast, and despite their outperformance since mid July, the premium embedded in CCC-rated bonds is still low. In our view, CCC spreads do not match the risk-reward available in high-rated credits.
Our investment themes in 2012: Play defense. While the premium in the high end of the
HY market is attractive on a buy-and-hold basis, we do not expect sustained compression anytime soon. On a relative basis, we would therefore position defensively across ratings, sectors, and duration. This means overweight BB-rated bonds vs. lower rated bonds, rotate to undervalued defensive sectors, and reduce spread duration risk. These themes are just a continuation of a trend that has seen defensives outperforming cyclicals since June of this year. Exhibit 2 illustrates this and shows the year to date performance of HY credits across ratings and maturity. One thing is clear: it has paid to play defense by rotating into higher quality and shorter dated bonds.
2011Q2
December 13, 2011
High Yield
Beware of additional risks from volatile fund flows and rising rates. In addition to a weaker macro picture, we think technicals in the HY market are likely to remain challenging in the near term. As shown by Exhibit 3, fund flows have been unusually volatile this year, which in our view is explained by the tight relationship between risk sentiment and HY fund flows (along with the obvious volatility of risk sentiment). We expect the large swings in mutual fund flows shown in Exhibit 3 will persist as the European debt crisis continues to cause wide swings in risk sentiment. As we have shown in previous work (see, for instance, Mutual fund flows matter less, but still help track sentiment, March 15, 2011, The Credit Line), mutual fund flows still matter for illiquid HY bonds. Volatile fund flows can be yet another headwind for the low end of the market.
We also expect rising rates to pose headwinds for high yield bonds in 2012. Our rates team forecast an upward shift in the Treasury yield curve by the end of 2012another reason to overweight short-dated bonds, in our view. Exhibit 2: High yield bond return by rating and maturity
The chart shows total return broken down into rate return and credit return
18% 13% 8% 3% -2% -7% -12% 1-3y 3-5y 5-7y
Maturity
Exhibit 3: We expect HY fund flows to remain volatile in 2012

The chart shows weekly flows into HY mutual funds
5,000 4,000 3,000 2,000
$Million
Treasury return Excess return Total return
1,000 0
(1,000) (2,000) (3,000)

7-10y 10y+ BB B
Rating
CCC
(4,000) Jan-07
Oct-07
Jul-08
Apr-09
Jan-10
Oct-10
Jul-11
Source: Goldman Sachs Credit Strategy, Bloomberg.
Source: Goldman Sachs Credit Strategy, AMG.
The credit risk premium is highest for high-quality bonds

Under normal circumstances, the strength of BB corporate balance sheets and the widening of spreads in the second half of the year would have made the high end of the market a bargain. But the risk of negative feedback loop posed by the European debt crisis will continue to weigh heavily on risk premia over the next few months. On a buy and hold basis, our favorite tool for assessing the attractiveness of cash spreads is the Credit Risk Premium (CRP). The CRP can be thought of as the expected excess return (net of losses) on a five-year buy and hold strategy of diversified credit portfolios. The key ingredient to our CRP estimates is to forecast cumulative loss rates over the next five years. The CRP is then calculated as the premium over the five-year government bond yield required to equate the present value of loss-adjusted coupons (and principal) to the current market value of a given bond portfolio. Put differently, this is just the internal rate of return on loss-adjusted cash flows, minus the yield on the five-year government Treasury bonds. In estimating our cumulative loss rate forecasts for the various rating buckets, we use three forward macro scenarios in our analysis: baseline, optimistic, and pessimistic. These
December 13, 2011
High Yield
scenarios are captured by three forward trajectories of GDP growth as shown by Exhibit 4. The baseline scenario relies on our US Economics team growth forecasts until the end of 2012 and then assumes sub-trend growth in 2013 followed by a return to trend growth in subsequent years. The pessimistic scenario assumes a mild two-year recession followed by sub-trend growth later on. Finally, the optimistic scenario assumes above-trend for the next two years followed by trend growth. Exhibit 5 provides our current estimates of the CRP, the 2012 12-month trailing default rates, and the five-year cumulative loss rates under our three scenarios. Exhibits 6 to 11 provide a time series perspective on our cumulative loss rate and CRP estimates. Exhibit 4: Our three forward scenarios for quarterly real GDP growth
10 8 6 4 2 0 -2 -4 -6 -8 -10 Jun-85 May-89 Apr-93 Mar-97 Feb-01 Jan-05 Dec-08 Nov-12 Oct-16 Baseline Optimistic Pessimistic
Source: Goldman Sachs Credit Strategy, BEA.
Looking at Exhibit 5, one can notice that the CRP response to the various macro scenarios is dramatically different across ratings. BB-rated bonds are fairly resilient to macro shocks as shown by the small variation of the CRP across scenarios. In general, the lower the rating, the higher the sensitivity to macro shocks and forward expected losses. The CRP differential between the optimistic and pessimistic scenarios for CCC-rated bonds is 490 bp vs. 30 bp for BB-rated bonds. Exhibit 5: CRP, loss, and default rates across the rating spectrum
Rating BB CRP 5-yr cum loss rate

*Issuer weighted
Baseline B 6.4 CCC 5.1 HY

*
Scenario Optimistic BB 5.6 B 6.8 CCC 6.9 14.1% HY

*
Pessimistic BB 5.3 B 5.6 CCC 2.0 HY* 6.5 7.8% 4.8
5.5
5.9
2012 12-month traling default rate 1.1% 2.8% 17.4% 5.8% 0.9% 1.9%
4.4% 1.4% 4.0% 21.6%
3.1% 8.1% 33.2% 13.2% 2.6% 28.0% 28.0% 11.0% 4.1% 11.6% 42.4% 17.5%
Source: Goldman Sachs Credit Strategy, Moodys, Bloomberg.
December 13, 2011
High Yield
In addition to this, our findings are the following: 1. BB- and B-rated bonds offer good value. On the other hand, the premium embedded in CCC-rated bonds is clearly low. With a CCC CRP of 2.0% under the pessimistic scenario and given the significant downside growth risk lying ahead, CCC spreads have to get a lot wider to make the risk-reward attractive. The history of the realized CRP shows that despite the recent widening of credit spreads, the current premium embedded in bonds is not remotely close to the peaks reached in the aftermath of the Lehman default. Even when benchmarked relative to the 2001/2002 recession, the current premium for HY issuers remains lower than the peaks reached in the aftermath of the 2001/2002 recession. Our five-year cumulative loss rate estimates are generally below the peaks of the 2001/2002 recession even under the pessimistic scenario. For the high end of the HY market (BB- and B-rated issuers), the differences with 2001/2002 are striking. We estimate the five-year cumulative loss rate for BB- and B- rate issuers will reach 3.1% and 8.1%, respectively. This is significantly below their respective estimated peaks of 6.5% and 21.2% in past cycles. For CCC-rated issuers, we forecast a five-year cumulative loss rate of 33.2%, which is also better than in the 2001/2002 recession.
2.
3.
Exhibit 6: Our CRP estimates for BB-rated bonds

Baseline Optimistic Pessimistic
Exhibit 7: Our CRP estimates for B-rated bonds

7% 6% 5% 4% 3% 2% 1%
14 12 10 8 6 4 2 0 Dec-96
Baseline
Optimistic
Pessimistic
Sep-00
Jun-04
Feb-08
Nov-11
0% Jan-00
Nov-02
Sep-05
Jun-08
Apr-11
Feb-14
Nov-16
December 13, 2011
High Yield
Exhibit 8: Our CRP estimates for CCC-rated bonds

18 15 12 9 6 3 0 -3 -6 Dec-96 Sep-00 Jun-04 Feb-08 Nov-11 Baseline Optimistic Pessimistic
Exhibit 9: Our 5-year cumulative loss rate estimates for BB-rated issuers
7% 6% 5% 4% 3% 2%
Exhibit 10: Our 5-year cumulative loss rate estimates for B-rated issuers
25%
Baseline
Optimistic
Pessimistic
20%
Baseline
Optimistic
Pessimistic
15%
10%
5%
1% 0% Jan-00
0% Jan-00
Nov-02
Sep-05
Jun-08
Apr-11
Feb-14
Nov-16
Nov-02
Sep-05
Jun-08
Apr-11
Feb-14
Nov-16
Source: Goldman Sachs Credit Strategy, Moodys.
10
December 13, 2011
High Yield
Exhibit 11: Our 5-year cumulative loss rate estimates for CCC-rated issuers
60% 53% 45% 38% 30% 23% 15% 8% 0% Jan-00 Nov-02 Sep-05 Jun-08 Apr-11 Feb-14 Nov-16
Baseline
Optimistic
Pessimistic
11
December 13, 2011
High Yield
Autos & Auto Suppliers: Coverage view and recommendations

Brian Jacoby, CFA Goldman, Sachs & Co. brian.jacoby@gs.com 1-212-902-3258 Franklin Jarman Goldman, Sachs & Co. franklin.jarman@gs.com 1-212-902-7537
We have a Neutral coverage view on both the automotive and the auto supplier sectors. Valuations appear to be balanced by a mixed fundamental outlook for the cyclical
global auto sector. In North America the fundamental outlook is positive as inventories and incentives remain relatively low and pent-up demand for new and used vehicles is good. For China, the worlds largest market for vehicles from a unit perspective, we expect the sales pace to slow but remain positive given the countrys growing economy. In Europe, however, the outlook is negative due to a weakening economy and significant excess capacity. We are forecasting global auto sales of 78 million units in 2012 (up 5.1% yoy) and 82.4 million units in 2013 (up 5.6%). Rebounding sales in Japan coupled with strong demand from China and India will drive global vehicle sales, in our view. Our US light SAAR (seasonally adjusted annual rate) forecast is 13.1 million units in 2012 and 13.9 million in 2013. The forecast assumes US real GDP growth of 1.5% in 2012 and higher growth in 2013. More importantly, strong pent-up demand in the US is the driving factor behind our growing SAAR forecast. During the 2008-2009 recession, US light vehicle sales fell to 10.4 million units, a level not seen since 1982. Consumers chose to delay purchases of new vehicles, causing scrappage rates to exceed new car sales and increasing the average vehicle age, which now stands at 10.6 years in 2010 (according to Polk), the oldest in decades. We anticipate that scrappage rates will be similar to new car sales in 2011 and will be below new car sales in 2012 as consumers replace older vehicles. This pent-up demand should support a 13.1 million SAAR in 2012. In Europe, we expect vehicle sales to decline 1.6% in 2012, and Western Europe, which is experiencing significant economic contraction, may see vehicle sales decline by nearly 3% (see chart below). Exhibit 12: Global vehicle sales forecast
Automotive Vehicle Sales (in mn units) US Light SAAR YoY Change Total European Sales YoY Change Western Europe YoY Change China YoY Change India YoY Change Japan YoY Change Global Sales YoY Change
2007 16.1 -3.0% 19.7 2.6% 16.8 0.6% 8.0 19.4% 1.7 15.4% 5.2 -6.5% 69.5 5.1%
2008 13.2 -18.0% 18.2 -7.6% 15.4 -8.3% 8.6 7.5% 1.7 1.5% 5.0 -5.0% 66.0 -5.0%
2009 10.4 -21.2% 16.8 -7.7% 14.9 -3.2% 13.0 51.2% 2.1 18.4% 4.6 -8.6% 63.7 -3.4%
2010 11.6 11.5% 16.5 -2.0% 14.4 -3.4% 16.9 30.0% 2.7 31.5% 4.9 7.6% 72.1 13.1%
2011E 12.8 10.0% 16.3 -1.2% 14.1 -2.1% 17.5 3.6% 3.0 11.1% 4.2 -14.3% 74.2 2.9%
2012E 13.1 2.7% 16.0 -1.6% 13.7 -2.8% 19.2 9.7% 3.3 10.0% 4.7 11.9% 78.0 5.1%
2013E 13.9 6.1% 16.7 4.4% 14.2 3.6% 20.5 6.8% 3.7 12.1% 4.7 0.1% 82.4 5.6%
Source: Company reports, Wards, CSM, Bureau of Economic Analysis, Goldman Sachs Credit Research.
2012 production rising in North America but falling in Europe: Based on the latest
IHS/CSM forecast, North American (NA) production should rise approximately 6% in 2012 and 2013. We are forecasting NA production to increase 3.9% yoy in 2012 and 6.8% in 2013. In Europe, IHS/CSM expects production to decrease by nearly 4% in 2012, but then increase by 6.6% in 2013. We agree with this forecast but see the risk skewed to the downside as the macroeconomic environment in Europe remains challenged.
December 13, 2011
High Yield
Exhibit 13: IHS/CSM North America, Europe, China, and South America production forecasts
North America (thousands of units) General Motors GM Cars YoY Change GM Light Trucks YoY Change Total YoY Change Ford Ford Cars YoY Change Ford Light Trucks YoY Change Total YoY Change Chrysler Chrysler Cars YoY Change Chrysler Light Trucks YoY Change Sub-Total YoY Change Other Sub-Total Total Chrysler Production YoY Change Total North America Cars YoY Change Light Trucks YoY Change Total YoY Change Europe
FY10 975 34.7% 1,828 54.8% 2,802 47.2% 914 38.1% 1,526 23.1% 2,440 28.3% 332 61.6% 1,225 66.3% 1,557 65.2% 16 1,573 66.3% 5,159 28.4% 6,782 48.8% 11,941 39.2% FY10
1Q11 284 16.8% 502 18.3% 786 17.8% 217 3.1% 449 20.8% 666 14.4% 101 11.8% 373 32.4% 473 27.4% 14 488 29.3% 1,411 9.7% 1,970 22.2% 3,381 16.7% 1Q11 3,532 6.6% 1,825 25.8% 5,357 12.5% 1Q11 2,605 8.9% 1,961 5.8% 4,566 7.5% 1Q11 761 6.5% 259 19.9% 1,019 9.6%
2Q11 305 9.4% 517 14.4% 822 12.5% 264 6.6% 447 8.3% 712 7.6% 119 6.1% 362 15.2% 481 12.8% 32 513 19.1% 1,346 (1.0%) 1,778 2.8% 3,124 1.1% 2Q11 3,544 0.1% 1,787 18.6% 5,330 5.6% 2Q11 2,358 5.6% 1,677 (7.5%) 4,034 (0.3%) 2Q11 824 3.9% 312 21.1% 1,136 8.1%
3Q11E 266 24.2% 473 (3.3%) 738 5.1% 246 6.3% 415 14.9% 661 11.6% 82 (0.9%) 355 12.2% 437 9.5% 27 464 15.1% 1,397 10.7% 1,769 2.9% 3,166 6.2% 3Q11E 2,992 2.7% 1,551 11.4% 4,544 5.6% 3Q11E 2,479 11.7% 1,671 (2.9%) 4,150 5.3% 3Q11E 832 0.6% 315 13.9% 1,147 3.9%
4Q11E 292 22.2% 445 (3.7%) 738 5.1% 237 6.0% 425 11.7% 662 9.6% 97 105.3% 344 9.8% 440 22.3% 29 469 29.4% 1,508 20.6% 1,780 3.3% 3,287 10.6% 4Q11E 3,171 (2.3%) 1,698 (2.0%) 4,869 (2.2%) 4Q11E 2,873 2.7% 1,952 (6.4%) 4,825 (1.2%) 4Q11E 766 (3.4%) 290 (2.0%) 1,056 (3.0%)
FY11E 1,147 17.6% 1,937 6.0% 3,083 10.0% 965 5.6% 1,736 13.7% 2,701 10.7% 399 19.9% 1,433 17.0% 1,832 17.6% 102 1,934 22.9% 5,662 9.8% 7,296 7.6% 12,959 8.5% FY11E 13,238 1.7% 6,862 12.8% 20,101 5.3% FY11E 10,315 7.0% 7,260 (2.8%) 17,575 2.7% FY11E 3,182 1.8% 1,176 12.4% 4,358 4.4%
1Q12E 309 8.8% 478 (4.7%) 787 0.2% 259 19.4% 440 (1.8%) 700 5.1% 84 (16.7%) 314 (15.7%) 398 (15.9%) 29 427 (12.5%) 1,629 15.5% 1,899 (3.6%) 3,528 4.4% 1Q12E 3,318 (6.0%) 1,674 (8.3%) 4,993 (6.8%) 1Q12E 2,697 3.5% 1,809 (7.8%) 4,506 (1.3%) 1Q12E 720 (5.4%) 267 3.1% 986 (3.2%)
2Q12E 317 4.0% 465 (10.1%) 782 (4.9%) 249 (5.9%) 432 (3.5%) 680 (4.4%) 106 (11.4%) 341 (5.7%) 447 (7.1%) 26 473 (7.8%) 1,599 18.7% 1,886 6.1% 3,485 11.5% 2Q12E 3,377 (4.7%) 1,662 (7.0%) 5,039 (5.5%) 2Q12E 2,894 22.7% 1,952 16.4% 4,846 20.1% 2Q12E 836 1.5% 325 4.1% 1,161 2.2%
3Q12E 328 23.4% 450 (4.8%) 778 5.3% 241 (1.8%) 411 (1.0%) 653 (1.3%) 93 13.2% 306 (13.8%) 399 (8.7%) 27 426 (8.2%) 1,540 10.2% 1,771 0.2% 3,311 4.6% 3Q12E 2,875 (3.9%) 1,443 (7.0%) 4,318 (5.0%) 3Q12E 2,774 11.9% 1,841 10.2% 4,615 11.2% 3Q12E 882 6.1% 339 7.3% 1,221 6.4%
4Q12E 341 16.5% 446 0.1% 786 6.6% 260 9.5% 438 3.1% 698 5.4% 93 (3.7%) 327 (4.8%) 420 (4.5%) 28 449 (4.4%) 1,600 6.1% 1,821 2.3% 3,421 4.1% 4Q12E 3,327 4.9% 1,678 (1.2%) 5,005 2.8% 4Q12E 3,068 6.8% 2,065 5.8% 5,132 6.4% 4Q12E 911 19.0% 321 10.4% 1,231 16.6%
FY12E 1,294 12.9% 1,839 (5.1%) 3,133 1.6% 1,009 4.6% 1,721 (0.8%) 2,731 1.1% 376 (5.8%) 1,289 (10.1%) 1,664 (9.1%) 110 1,774 (8.2%) 6,368 12.5% 7,378 1.1% 13,745 6.1% FY12E 12,897 (2.6%) 6,458 (5.9%) 19,355 (3.7%) FY12E 11,433 10.8% 7,667 5.6% 19,099 8.7% FY12E 3,349 5.2% 1,251 6.3% 4,599 5.5%
FY13E 1,300 0.5% 1,911 3.9% 3,211 2.5% 1,085 7.5% 1,792 4.1% 2,876 5.3% 496 32.0% 1,326 2.9% 1,822 9.5% 119 1,941 9.4% 6,836 7.4% 7,794 5.6% 14,631 6.4% FY13E 13,857 7.4% 6,768 4.8% 20,625 6.6% FY13E 12,053 5.4% 8,479 10.6% 20,532 7.5% FY13E 3,714 10.9% 1,300 4.0% 5,015 9.0%
FY14E 1,399 7.6% 1,910 (0.0%) 3,310 3.1% 1,095 1.0% 1,868 4.2% 2,963 3.0% 473 (4.7%) 1,478 11.5% 1,951 7.1% 141 2,092 7.8% 7,429 8.7% 8,256 5.9% 15,685 7.2% FY14E 14,807 6.9% 7,154 5.7% 21,961 6.5% FY14E 13,059 8.3% 9,658 13.9% 22,716 10.6% FY14E 3,988 7.4% 1,368 5.2% 5,356 6.8%
Total Europe Cars YoY Change Light Trucks YoY Change Total YoY Change China
13,011 (12.2%) 6,083 309.0% 19,094 17.1% FY10
Total China Cars YoY Change Light Trucks YoY Change Total YoY Change South America
9,643 28.6% 7,471 34.5% 17,113 31.1% FY10
Total South America Cars YoY Change Light Trucks YoY Change Total YoY Change
3,127 9.3% 1,047 25.8% 4,173 13.0%
Source: IHS Automotive, Goldman Sachs Credit Research.
Improving Commercial truck cycle continues in North America but stalls in Europe:
Based on the latest ACT Research forecast, North American (NA) Class 8 and Class 5-7 truck production should rise approximately 25% and 20%, respectively, in 2012. Medium and heavy truck production in Western Europe, however, is expected to decline by 10%, driven by recent macroeconomic weakness that has led to a downward adjustment in 2012 growth forecasts from +22% as of June 2011. South American medium and heavy truck production will likely decline by about 5% next year as a result of the pre-buy that pulled demand forward into 2011.
13
December 13, 2011
High Yield
Replacement tire shipments growth expected to be anemic in 2012: Slowing economic

growth in the United States has lowered expectations for tire shipments in 2012, with the most recent Rubber Manufacturers Association forecast projecting a roughly 2% growth rate. This follows slow growth in the latter part of 2011 (with full year 2011 shipments growth expected to be 1%) and represents a deceleration from 2010s growth rate of 10%. Replacement tire growth for passenger cars (less than 1%) is expected to lag OE tire shipment growth (13%), while the outlook for light truck tire replacement (0% growth) and OE tires (7% decline) is negative as consumers and OEs shift toward purchasing light trucks built on more fuel-efficient car platforms. Exhibit 14: Commercial truck production Class 8
400 350 300 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011E 2012E 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
Exhibit 15: United States tire shipments

320 310 300 290 280 270 260 250 240 230 2007 2008 2009 2010 2011E 2012E -10% 10% 5% 0% -5% 15%
Class 8 production (thousand)

Source: ACT Research.
yoy growth
US Tire Shipments (thousand)

Source: Rubber Manufacturers Association.
yoy growth
Ford Motor Company and Ford Motor Credit Company: investment grade ratings not too far down the road
Exhibit 16: Benchmark securities & CDS
GS Rating OP OP OP OP Size (mn) 361 1,794 1,500 2,000 1year 220 200 Coupon (%) 6.500 7.450 8.000 5.875 3year 330 290 Agency Ratings Ba2/BB+ Ba2/BB+ Ba1/BB+ Ba1/BB+ Bid Price 106.00 115.00 113.25 101.75 YTW (%) 5.41 6.12 4.97 5.64 Tspread (bp) 340 310 412 363
Ticker F F FMCC FMCC
Priority SrUnsec SrUnsec SrUnsec SrUnsec 5year 440 320
Maturity 1Aug18 16Jul31 15Dec16 2Aug21 10year 480 365
CDSLevels(mid) FordMotorCo. FordMotorCreditCo.

Source: Goldman Sachs.
Why Ford should outperform in 2012

We expect Ford Motor Company and Ford Motor Credit (FMCC) to be upgraded to investment grade in the second half of 2012, and Fords bonds look attractive relative to
IG automotive companies. For example, the Ford 7.45% bonds of 2031 are quoted approximately 200 bp wide to the Johnson Controls 4.25% of 2021 on a Z-spread basis. We
December 13, 2011
High Yield
see this spread differential narrowing to 75-100 bp by 2H2012. Year to date through 3Q2011, Ford has reduced total automotive debt by $6.4 billion, including the full repayment of its secured term loan and revolver. Ford remains committed to regaining investment grade ratings in the near term and reducing total automotive debt to about $10 billion by middecade from $12.7 billion at 3Q2011. Recently Ford reinstated a shareholder dividend of approximately $760 million annually ($0.20 per share). In our view, Ford has the financial flexibility to pay this level of dividend given its healthy free cash flow, improved balance sheet, and strong earnings outlook. Furthermore, Fords plans to pay a dividend reveal that the company is confident about its 2012 earnings and FCF outlook. From a product perspective, Ford continues to gain market share in the US with the success of its new Explorer SUV and Focus small car, as well as the Fiesta and Fusion vehicles.
Key risks to our view

A weaker than expected macro environment, and a delayed upgrade to investment grade.
Fords 2012 outlook

In the HY automotive sector, we view Ford as a low-beta company given its strong liquidity, healthy balance sheet, and positive FCF. For 2012, we expect Ford to generate pretax automotive profits of $7.1 billion and automotive free cash flow of $2.1 billion. Our FCF forecast assumes higher discretionary pension contributions, as well as $760 million in shareholder dividends. All of Fords automotive regions should be profitable, but Europe may only be slightly better than breakeven in 2012 given the difficult economic outlook. Fords core NA auto business should have pretax profits of $6.5 billion in 2012, versus our estimate of $6.2 billion in 2011. At Ford Motor Credit, we expect $1.6 billion in pretax profits in 2012, down from an estimated $2.3 billion in 2011. The lower profits at FMCC will be driven by reduced gains on off-lease vehicles and lower credit loss reserve reductions. We expect Ford to begin repaying the Department of Energy loans by 4Q2012, and leverage should fall slightly to 1.2x by year-end 2012, versus 1.3x at 3Q2011. From a leverage and liquidity perspective, we believe that Ford already has an investment grade credit profile. One of the main factors holding back the rating agencies from upgrading Ford to IG, in our view, is the fiscal problems in Europe and the implications for the global economy.
15
December 13, 2011
High Yield
Exhibit 17: Ford versus IG auto comps

BWA F LTM 3Q2011 Ranking Srs. Srs. Rating Baa2/BBB Ba2/BB+ Coupon 4.625% 7.450% Maturity 9/15/20 7/16/31 Price ($) 103.37 115.00 Yield (%) 4.2% 6.1% T-Spread (bp) +215 +310 Z-Spread (bp) +223 +368 5-year CDS (bp) +170 +440 GS Rating OP OP Credit Metrics (LTM) Revenues 6,874 125,787 EBITDA 1,005 10,100 Margin 14.6% 8.0% Free Cash Flow 323 4,266 Total Debt 1,393 12,654 Cash 377 20,776 Net Debt 1,016 (8,122) Leverage 1.4x 1.3x EV/EBITDA 8.3x 3.3x Z-Spread/Leverage +160.7 +293.3 Note: JCI fiscal year end September 30 JCI Srs. Baa1/BBB+ 4.250% 3/1/21 104.59 3.7% +165 +166 +165 IL 40,833 2,718 6.7% (662) 5,146 257 4,889 1.9x 9.7x +87.6 2012E Ranking Rating Coupon Maturity Price ($) Yield (%) T-Spread (bp) Z-Spread (bp) 5-year CDS (bp) GS Rating Credit Metrics (2012E) Revenues EBITDA Margin Free Cash Flow Total Debt Cash Net Debt Leverage EV/EBITDA Z-Spread/Leverage BWA Srs. Baa2/BBB 4.625% 9/15/20 103.37 4.2% +215 +223 +170 OP 8,000 1,140 14.3% 206 1,380 450 930 1.2x 7.3x +184.0 F Srs. Ba2/BB+ 7.450% 7/16/31 115.00 6.1% +310 +368 +440 OP 131,657 11,524 8.8% 2,169 13,929 23,305 (9,376) 1.2x 2.8x +304.1 JCI Srs. Baa1/BBB+ 4.250% 3/1/21 104.59 3.7% +165 +166 +165 IL 44,000 3,450 7.8% 371 5,500 397 5,103 1.6x 7.7x +104.1
Source: Company reports, Goldman Sachs Credit Research estimates.
Company description
Ford Motor Company is a global automotive manufacturer that operates in 200 markets, spanning six continents. The company is headquartered in Dearborn, Michigan, and employed 166,000 workers at the end of 3Q2011. Worldwide, Ford sold 5.3 million vehicles in 2010, and is on track to exceed this level of sales in 2011. In its largest market, North America, Ford sold 2.4 million vehicles in 2010, and is on track to sell approximately 2.7 million in 2011. Approximately 54% of Ford's auto revenues were in North America, and it held a 16.5% US market share ytd through 3Q2011, up approximately 30 bp year over year. Over the past few years, Ford has trimmed its brands to just two: Ford and Lincoln. In 2010, Ford ended production of its Mercury-branded vehicles and sold its former Volvo car business to China's Zhejiang Geely Holding Group for $1.8 billion. In 2008, Ford divested its Jaguar and Land Rover operations to Tata Motors for approximately $2.3 billion. The companys CEO is Alan Mulally, and its core North American auto business is run by Mark Fields. Ford's wholly owned captive finance subsidiary, Ford Motor Credit Company (FMCC), provides vehicle financing to both retail and wholesale customers. FMCC ended 3Q2011 with total assets of $97.5 billion, cash and securities of $12.4 billion, managed receivables of $82 billion, and managed leverage of 8.0x. Ford expects FMCC's managed receivables to grow to approximately $110-$120 billion by mid-decade.
16
December 13, 2011
High Yield
Exhibit 18: Ford Motor Company financial model

Financial Profile* ($MN) Revenue EBITDA Interest Expense Consolidated Net Income Depreciation & Amortization Other oper cash flow incl pension Change in Working Capital Net Auto Operating Cash Flow CapEx Dividends Free Cash Flow (FCF) Assets Sold (Acquired) Debt Increase (Decrease) Stock Increase (Decrease) Cash (to)/from FMCC & Ford Hldgs Other Cash Flows Total Chg in Cash, Equivs & ST VEBA *FMCC accounted for on an equity basis Cash & Equivs + Short-term VEBA Total on-balance sheet Debt 1 Net Debt (Net Cash) FY08 129,166 1,041 1,938 (14,672) 5,803 2,429 (6,000) (12,440) (6,620) 0 (19,060) 3,143 (287) 756 9 (5,807) (21,246) 13,391 25,846 12,455 FY09 103,868 3,033 1,477 2,717 3,743 (7,286) 3,700 2,874 (4,043) 0 (1,169) 8 9,496 2,450 1,000 (245) 11,540 24,931 33,610 8,679 FY10 119,280 9,963 1,807 6,561 3,876 (3,974) (100) 6,363 (4,066) 0 2,297 1,318 (12,107) 1,339 2,700 30 (4,423) 20,508 19,077 (1,431) LTM3Q11 125,787 10,100 966 6,788 3,680 (2,447) 500 8,521 (4,255) 0 4,266 135 (12,191) 109 4,100 469 (3,112) 20,776 12,654 (8,122) FY11E 129,079 10,247 815 7,913 3,606 (3,796) 475 8,198 (4,621) 0 3,577 135 (5,844) 0 3,000 (365) 503 21,011 13,154 (7,857) FY12E 131,657 11,524 724 6,079 4,000 (1,750) (100) 8,229 (5,300) (760) 2,169 0 775 0 0 (650) 2,294 23,305 13,929 (9,376) FY13E 139,542 12,982 675 7,203 4,025 (2,300) 350 9,278 (5,500) (912) 2,866 0 (1,050) 0 0 (600) 1,216 24,521 12,879 (11,642)
Key Credit Statistics LTM Secured Debt/EBITDA 6.6x 6.9x LTM Total Debt/EBITDA 24.8x 11.1x LTM FCF/Total Debt -73.7% -3.5% EBITDA/Interest Expense 0.5x 2.1x EBITDA margin 0.8% 2.9% 1 Includes NPV of New UAW Note A and New Note B in 2009 and in 1Q2010 Capitalization - Ford (auto) Description Revolver due Dec 2011 Revolver due Nov 2013 Term Loan B1 due 2013 DOE Loans, EXIM & EIB Total Sr Sec Debt 6.500% 8/1/2018 7.450% 7/16/2031 Convertible Debt Other Sr Unsec Debt Total Sr Unsec Debt Subordinated Convertible Debt Total Automotive Debt Pension deficit - tax adjusted Total adj automotive debt Market Cap Enterprise Value 9/30/2011 Size EBITDA (x) 0 0 0 5,301 5,301 361 1,794 700 4,499 7,353 0 12,654 9,117 21,771 41,134 42,128
0.9x 1.9x 12.0% 5.5x 8.4%
0.5x 1.3x 33.7% 10.5x 8.0%
0.6x 1.3x 27.2% 12.6x 7.9%
0.6x 1.2x 15.6% 15.9x 8.8%
0.4x 1.0x 22.3% 19.2x 9.3%
Ford (auto) Liquidity Revolvers Letters of Credit/Other Borrowings Revolver Availability
9/30/2011 10,192 0 0 10,192 20,776 30,968
0.5x Cash Total Liquidity
1.3x 1.3x 2.0x 4.1x 4.2x
Meritor: Favorable credit metrics outweigh management missteps

Exhibit 19: Benchmark securities and CDS
Ticker MTOR MTOR CDS GS Rating OP Rating B3/CCC+ Amt. 252 Coupon 8.125% Ranking Sr. Nts Maturity 15-Sep-15 5 year Price 91.00 23 pts YTW 11.1% STW 1,020
Source: Goldman Sachs Credit Research.
We rate Meritors 8.125% senior notes due 2015 Outperform and believe they offer attractive value at $91.00 (11.1% YTW). We acknowledge that the companys FY2012 results
17
December 13, 2011
High Yield
should be back-end loaded and could create some near-term negative headlines and volatility. However, the strength of the North American commercial truck cycle remains favorable and its high margin military business should drive stronger second-half growth and enable the company to reduce gross leverage from 3.0x to 2.5x by years end.
Why the credit should outperform in 2012

Despite successive guidance revisions in 2011 and a disappointing outlook for 2012, we cannot ignore Meritors still-favorable credit metrics relative to the level it is trading at. Meritor 5-year CDS is trading at its widest discount to the high yield auto supplier space since 2009. If the company can achieve only half of its targeted growth, gross leverage should decline below 3x and the company should generate positive free cash flow. Over 2012, we expect the credit to outperform as the market recognizes Meritors continued growth, margin recovery, improving credit metrics, manageable maturity schedule, and adequate liquidity. The key risks to our thesis include slower European truck demand, softer military revenues in the first half of the fiscal year and weaker-than-expected free cash flow.
Continued revenue growth: Although Meritor reduced its industry growth forecasts for
2012, the company still expects increased demand in North America Commercial Truck (+23% yoy) and Trailer (+16% yoy). We believe that fundamental data for North America including strong freight demand and lagging truck and trailer spending relative to GDP is supportive of continued growth in these areas. Despite slower than anticipated top-line growth, we believe Meritor will be able to grow EBITDA by 9% to $373 million in 2012 thanks to better pricing, raw material cost recoveries, and a reduction in freight and labor premiums versus those incurred to support the ramp up in 2011.
Moderate margin recovery: We expect Meritors margins to recover as input cost

increases slow in early 2012. The company also seeks to lift prices on its products and implement pass-through agreements with its customers, an action which Dana has already undertaken with some success. Meritor estimates that pricing adjustments will contribute up to 1% to EBITDA margins in 2012. In addition to price increases, we think Meritors margins should benefit from a slowdown in growth in North America as the company will reduce its reliance on costly contracts with third-party suppliers to meet customer orders.
Improving credit metrics: Meritors 4QFY11 results mark the eighth consecutive quarter
of delevering, with leverage versus the close of 2010 improving to 3.0x (2.4x net) from 3.6x (2.4x net). Based on the companys guidance for 2012 revenue of $4.8 billion, which we believe is achievable, and our projection of below-target EBITDA margin of 7.7% for FY2012 versus guidance of 8.2%-8.6% we expect Meritor to deliver EBITDA of $373 million next year and expect gross leverage to drop to 2.5x (2.3x net) by F4QFY12.
Manageable maturity schedule: Meritors debt maturity runway is manageable, in our

view, with $84 million of 8.75% senior notes maturing in March 2012 and no further outstanding maturities prior to 2015.
Adequate liquidity: Following a strong cash flow quarter, Meritor ended fiscal 2011 with
$217 million of cash on hand. While we were disappointed with the company's December 8 disclosure that $60 million in cash is not readily accessible, we believe $55 million of nearterm cash inflows should boost the company's liquidity around its $84 million bond maturity in March 2012. Meritor ended FY2011 with $217 million in cash and $415 million of revolver availability, with only one debt maturity ($84 million due March, 2012) coming due before 2015.
18
December 13, 2011
High Yield
Exhibit 20: Truck freight volumes remain elevated

Seasonally adjusted series, indexed at 100 in January 2000
120 15%
Exhibit 21: Cash to decrease in 2012, but it has been lower on an absolute level and relative to revenue
400 350 300 250 200 150 100 50 0 8% 7% 6% 5% 4% 3% 2% 1% 0%
115
10%
110
5%
105
0%
100
-5%
1Q12E
2Q12E
3Q12E
95
-10%
90
-15%
Cash
Cash % of LTM Rev
Jan-11
Jul
Jul
Jul
Jul
Jul
Apr
Apr
Apr
Apr
Oct
Oct
Oct
Oct
Apr
Jan-07
Jan-08
Jan-09
ATA Truck Tonnage
% chg yoy
Source: Goldman Sachs, company reports.
Jan-10
Jan-06
Oct
Apr
Jul
Source: Goldman Sachs, company reports.
Recent developments and 2012 outlook

Meritors fiscal 4Q revenue of $1.22 billion (+29% yoy) was in line with guidance and consensus and reflected the continued strength in the North American commercial truck cycle. Adjusted EBITDA of $97 million (up 29% yoy; 8.0% margin) and free cash flow of $43 million came in ahead of low expectations. Gross leverage declined in fiscal 4Q to 3.3x (versus 4.0x at 4Q2010) - in line with our expectations. MTOR's 2012 outlook for revenues of $4.8 billion was below the Street's expectation, driven by generally downward revisions in 2012 industry volume forecasts from the numbers MTOR provided at the end of 3QFY2011. Nevertheless, the company does expect to grow adjusted EBITDA margins to 8.2%-8.6% next year, above consensus expectations of 7.9%. Management's 2012 margin guidance implies EBITDA should improve to over $400 million, which should drive gross leverage below 2.5x next year.
Company description
Meritor, Inc., formerly ArvinMeritor, provides the global transportation industry with integrated systems, modules, and components. The company serves commercial truck, trailer, and specialty original equipment manufacturers and related aftermarkets. Meritor also provides coil coating applications, including those for the transportation, appliance, construction, and furniture industries.
4Q12E
1Q09
2Q09
3Q09 4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11 3Q11
4Q11
19
December 13, 2011
High Yield
Exhibit 22: Meritor Financial model

Income Statement Total Revenues YoY Change
Gross Costs Adjusted EBIT EBIT Margin Depreciation & Amortization Adjusted EBITDA EBITDA Margin Net Interest Expense Cash Flow Statement Net Income Depreciation & Amortization Changes in Working Capital Other Operating Items Operating Cash Flow Capital Spending Dividends Free Cash Flow Acquisitions/Divestitures Share Issuance/Repurchase Debt issuance/repurchase Other Cash Flow Items Change in cash Balance Sheet Cash & Equivs Bank debt Total debt Net debt Shareholders' Equity Credit Stats Bank debt/EBITDA Debt/EBITDA Net Debt/EBITDA EV/EBITDA EBITDA/Interest Exp. (EBITDA-Capex)/Interest Exp. FCF/Debt Market capitalization Enterprise Value FY09 1Q10 2Q10 3Q10 4Q10 FY10 1Q11 2Q11 3Q11 4Q11 FY11 1Q12E 2Q12E 3Q12E 4Q12E FY12E FY13E LTM-4Q11
4,457.0 -37.8%
4,435.0 22.0 0.5% 81.0 103.0 2.3% 88.0
1,146.0 -16.4%
1,101.0 45.0 3.9% 18.0 63.0 5.5% 23.0
1,207.0 8.7%
1,163.0 44.0 3.6% 20.0 64.0 5.3% 31.0
1,275.0 28.4%
1,207.0 68.0 5.3% 19.0 87.0 6.8% 27.0
956.0 -2.8%
894.0 62.0 6.5% 13.0 75.0 7.8% 25.0
4,584.0 2.8%
4,368.0 216.0 4.7% 70.0 286.0 6.2% 106.0
971.0 -15.3%
925.0 46.0 4.7% 16.0 62.0 6.4% 27.0
1,192.0 -1.2%
1,128.0 64.0 5.4% 17.0 81.0 6.8% 24.0
1,287.0 0.9%
1,202.0 85.0 6.6% 17.0 102.0 7.9% 22.0
1,217.0 27.3%
1,136.0 81.0 6.7% 16.0 97.0 8.0% 22.0
4,667.0 1.8%
4,391.0 276.0 5.9% 66.0 342.0 7.3% 95.0
1,011.8 4.2%
957.3 54.4 5.4% 16.0 70.4 7.0% 21.3
1,230.7 3.2%
1,154.4 76.3 6.2% 16.0 92.3 7.5% 21.3
1,355.6 5.3%
1,257.3 98.2 7.2% 16.0 114.2 8.4% 21.3
1,232.9 1.3%
1,152.4 80.5 6.5% 16.0 96.5 7.8% 21.3
4,830.9 3.5%
4,521.5 309.4 6.4% 64.0 373.4 7.7% 85.4
5,034.1 7.9%
4,681.7 352.3 7.0% 64.0 416.3 8.3% 95.0
4,667.0 -4,391.0
276.0
5.9%
66.0 342.0
7.3%
95.0
(1,212.0) 81.0 59.0 1,068.0 (4.0) (111.0) (8.0) (123.0) 0.0 0.0 (92.0) (187.0) (402.0)
1.0 18.0 (47.0) 55.0 27.0 (22.0) 0.0 5.0 0.0 0.0 (2.0) 7.0 10.0
17.0 20.0 45.0 (17.0) 65.0 (20.0) 0.0 45.0 0.0 209.0 (53.0) (32.0) 169.0
1.0 19.0 83.0 (56.0) 47.0 (14.0) 0.0 33.0 0.0 0.0 (18.0) 0.0 15.0
4.0 13.0 (35.0) 90.0 72.0 (23.0) 0.0 49.0 0.0 0.0 44.0 (39.0) 54.0
23.0 70.0 46.0 72.0 211.0 (79.0) 0.0 132.0 0.0 209.0 (29.0) (64.0) 248.0
(5.0) 16.0 (159.0) 99.0 (49.0) (25.0) 0.0 (74.0) 0.0 0.0 0.0 7.0 (67.0)
17.0 17.0 118.0 (119.0) 33.0 (17.0) 0.0 16.0 0.0 0.0 0.0 (97.0) (81.0)
17.0 17.0 (16.0) 16.0 34.0 (26.0) 0.0 8.0 0.0 0.0 0.0 (2.0) 6.0
31.0 16.0 (12.0) 45.0 80.0 (37.0) 0.0 43.0 0.0 0.0 0.0 (27.0) 16.0
60.0 66.0 (69.0) 41.0 98.0 (105.0) 0.0 (7.0) 0.0 0.0 0.0 (119.0) (126.0)
28.1 16.0 (50.5) 14.5 8.2 (25.0) 0.0 (16.8) 0.0 0.0 (84.0) 0.0 (100.8)
46.7 16.0 (12.0) (51.1) (0.4) (25.0) 0.0 (25.4) 18.0 0.0 0.0 0.0 (7.4)
65.3 16.0 (40.7) (13.7) 27.0 (25.0) 0.0 2.0 0.0 0.0 0.0 0.0 2.0
50.3 16.0 69.0 (50.4) 84.8 (30.0) 0.0 54.8 0.0 0.0 0.0 0.0 54.8
190.4 64.0 (34.2) (100.6) 119.6 (105.0) 0.0 14.6 18.0 0.0 (84.0) 0.0 (51.4)
218.7 64.0 (2.3) (139.8) 140.7 (105.0) 0.0 35.7 0.0 0.0 0.0 0.0 35.7
60.0 66.0 (69.0) 41.0 98.0 (105.0) 0.0

(7.0)
0.0 0.0 0.0 (119.0)

(126.0)
95.0 78.0 1,177.0 1,082.0 (1,277.0)
105.0 120.0 1,090.0 985.0 (1,143.0)
274.0 0.0 1,032.0 758.0 (910.0)
289.0 0.0 1,019.0 730.0 (946.0)
343.0 0.0 1,029.0 686.0 (1,054.0)
343.0 0.0 1,029.0 686.0 (1,054.0)
276.0 0.0 1,030.0 754.0 (1,024.0)
195.0 0.0 1,032.0 837.0 (1,006.0)
201.0 0.0 1,034.0 833.0 (1,009.0)
217.0 0.0 1,034.0 817.0 (995.0)
217.0 0.0 1,034.0 817.0 (995.0)
116.2 0.0 950.0 833.8 (966.9)
108.8 0.0 950.0 841.2 (920.2)
110.8 0.0 950.0 839.2 (854.9)
165.6 0.0 950.0 784.4 (804.6)
165.6 0.0 950.0 784.4 (804.6)
201.3 0.0 950.0 748.7 (585.9)
217.0 0.0 1,034.0 817.0 (995.0)
0.8x 11.4x 10.5x 13.0x 1.2x (0.1x) -10.5% 254.5 1,336.5
0.7x 6.8x 6.1x 11.2x 1.8x 0.9x 24.9% 812.8 1,797.8
0.0x 5.5x 4.0x 9.2x 1.9x 1.2x 26.0% 969.2 1,727.2
0.0x 4.2x 3.0x 8.1x 2.4x 1.8x 25.4% 1,262.8 1,992.8
0.0x 3.6x 2.4x 7.6x 2.7x 2.0x 12.8% 1,499.6 2,185.6
0.0x 3.6x 2.4x 7.6x 2.7x 2.0x 12.8% 1,499.6 2,185.6
0.0x 3.6x 2.6x 9.3x 2.6x 1.9x 5.1% 1,914.5 2,668.5
0.0x 3.4x 2.7x 7.0x 3.0x 2.2x 2.3% 1,293.6 2,130.6
0.0x 3.2x 2.6x 6.6x 3.3x 2.3x -0.1% 1,292.3 2,125.3
0.0x 3.0x 2.4x 4.2x 3.6x 2.5x -0.7% 629.2 1,446.2
0.0x 3.0x 2.4x 4.2x 3.6x 2.5x -0.7% 629.2 1,446.2
0.0x 2.7x 2.4x 4.2x 3.9x 2.7x 5.3% 629.2 1,463.0
0.0x 2.6x 2.3x 4.1x 4.2x 2.9x 0.9% 629.2 1,470.4
0.0x 2.5x 2.2x 3.9x 4.3x 3.0x 0.3% 629.2 1,468.4
0.0x 2.5x 2.1x 3.8x 4.4x 3.1x 1.5% 629.2 1,413.6
0.0x 2.5x 2.1x 3.8x 4.4x 3.1x 1.5% 629.2 1,413.6
0.0x 2.3x 1.8x 3.3x 4.4x 3.3x 3.8% 629.2 1,377.9
0.0x 3.0x 2.4x 8.0x 3.6x 2.5x -0.7% 1,914.5 2,731.5
Capital Structure - LTM Secured Revolver due Jan-2014 (L+425) A/R Securization facility due Oct-2013 8.75% Notes due 2012 8.125% Notes due 2015 10.625% Notes due 2018 4.625% Convert Notes due 2026 4.0% Convert Notes due 2027 Unamortized Discounts/Other Total Debt Less cash Net Debt
Amt Outst 0.0 0.0 84.0 250.0 245.0 300.0 200.0 (45.0) 1,034.0 217 817.0
Book Lever. 0.0x 0.0x 3.0x 3.0x 3.0x 3.0x 3.0x 3.0x 3.0x 0.6x 2.4x
Revenues by Region North Am. Europe Asia/Pacific South America Revenues by Customer (PF) Truck - Volvo - Navistar Aftermarket & Trailer Industrial
52% 21% 14% 13%
Global Pension Proj Benefit Oblig Plan Assets Over/(Under)funded PBO as a % mkt cap OPEB Status Proj Obligation Plan Assets Over/(Under)funded
9/30/10 1,963 1,354 (609) 103% 9/30/10 594 0 (594)
53% 15% 12% 23% 24%
Liquidity Revolver Size - Amt Drawn - LCs Drawn Amt Unutilized A/R Securitization Avail. Cash Liquidity
LTM 441 0 26 415 125 217 757
Corporate Debt Maturities 2011 2012 2013 2014 2015 Thereafter
0 84 0 26 250 674
Source: Goldman Sachs Credit Research, Company Reports
Goodyear Tire: Pension deficit exacerbates cash flow concerns

Ticker GT GT CDS GS Rating U Rating B1/B+ Amt. 1,000 Coupon 8.250% Ranking Sr. Nts Maturity 15-Aug-20 5 year Price 108.50 5 pts YTW 6.6% STW 571
With Goodyear Tires 8.25% senior notes of 2020 trading at $108.5 (6.6%) YTW and CDS at 4 points up front, we believe the credit trades too tight and would be short the name going into 2012. We are most concerned about Goodyears growing pension deficit, continued weak free cash flow, and moderating tire shipment volumes. We prefer American Axle CDS, which trades 4 points wide of Goodyear despite higher expected top-line growth supported by a growing backlog and increased customer diversification, which we expect will allow Axle to continue delevering. Key risks to our thesis include the potential for raw material prices to decline further (boosting margins), stronger free cash flow or an improved pension funding status.
December 13, 2011
High Yield
Why the credit should underperform in 2012

While Goodyear Tire has been able to offset high raw material costs with a series of price increases in recent months, we think the credit will trade down in 2012 as (1) declining interest rates and asset values combine to significantly reduce Goodyears pension funded status, (2) weaker demand constrains top-line growth, and (3) the company continues to burn cash. Moving into 2012, we expect Goodyear Tire to recognize an increase in the size of its pension deficit given 2011s decline in interest rates coupled with depressed returns on pension assets. Specifically, the company entered 2011 with a funded status of 66%. The US pension plans December 2011 PBO of $5.64 billion is almost twice the size of the companys current market cap, and the US pension deficit of $1.93 billion is over half the size of the current market cap. Goodyear has disclosed that it expects its US pension plan assets to decline by $33 million for a 1% decline in the equity market, and expects its projected benefit obligation (PBO) to increase by $298 million for a 0.5% decline in discount rates. Year to date, equity markets have declined by 2.0% and the Moodys AAA corporate bond rate has declined by 1.0%, which we estimate would lead to a $650 million increase in GTs US pension deficit. We believe moderating tire shipment volumes and continued negative free cash will present additional headwinds for the credit in 2012. Exhibit 24: GT pension plan details as of 12/31/2010
US Funded Status Proj Benefit Obligation (PBO), $mn Plan Assets, $mn Over/(Under)funded Market Cap (current) PBO as % of market cap Asset Allocation Equity Debt Cash/Alts Assumed Beta to US Equity 66% 31% 3% 0.89 32% 52% 16% 0.70 53.8% 38.5% 7.7% 0.82 164% 78% 5,641 3,714 (1,927) 2,696 2,074 (622) 8,337 5,788 (2,549) 3,439 242% Int'l Total Impact to plan assets in event of: Disclosed sensitivity to equity return of: YTD return on S&P500: Plan Assets after S&P return of: Impact to PBO in event of: Disclosed sensitivity to discount rate change of: YTD change in discount rate: PBO after discount rate change of: Impact to Funded Status Cumulatative change to Funded Status New Funded Status (650) (2,577) (308) (930) (958) (3,507) -0.5% -1.0% -1.0% 298 584 6,225 142 279 2,975 440 863 9,200 1.0% -2.0% -2.0% 33 (66) 3,648 15 (29) 2,045 48 (95) 5,693
Exhibit 25: GT pension sensitivity analysis for 2011 YTD

US Int'l Total
Source: Goldman Sachs, company reports, Bloomberg.
Source: Goldman Sachs, company reports, Bloomberg.

Goodyear Tire reported strong 3Q revenue growth of 22% driven by 8.4% volume growth in Europe, Middle East & Africa as well as strong pricing/mix which drove revenue per tire higher by 18% yoy. Raw materials remained a headwind of $554 million but were more than offset by $739 million of improved price/mix. Adjusted EBITDA of $560 million reflected the strong top-line growth. GT reported a 9.2% EBITDA margin, which is the best result weve seen for the company since 2007. Leverage remained manageable at 3.0x (1.9x net) reflecting EBITDA growth, partially offset by higher debt levels. Liquidity remained adequate for now thanks to $2.1 billion of cash on hand. On the downside, the cash flow story remains problematic. While 3Q is traditionally a low cash flow quarter, the 3Q2011 burn of $360 million was 58% higher than in 2010. This follows a $1.2 billion free cash flow burn in 1H2011. We expect moderating tire shipment volumes and continued negative free cash flow to weigh on GT in coming quarters. The Rubber Manufacturers Association expects lackluster industry growth of 2% in 2012, which we believe would translate into unit and revenue growth of 0% and 3% for GT given its European exposure not enough to drive a reduction in leverage. In addition, we expect a continued cash burn on the order of $210 million in 2012, which would represent the third consecutive year of negative free cash flow.
21
December 13, 2011
High Yield
Company description
The Goodyear Tire & Rubber Company develops, manufactures, distributes, and sells tires for most applications. The company also manufactures and markets several lines of rubber and rubber-related chemicals, and provides automotive repair services. Goodyear also retreads truck, aircraft, and heavy equipment tires. The company provides its products and services worldwide. Exhibit 26: Goodyear Tire Financial model
Income Statement ($, mn) Total Revenues YoY Change
Gross Costs Adjusted EBIT EBIT Margin Depreciation & Amortization Adjusted EBITDA EBITDA Margin Net Interest Expense Cash Flow Statement Net Income Depreciation & Amortization Changes in Working Capital Other Operating Items Operating Cash Flow Capital Spending Dividends Free Cash Flow Acquisitions/Divestitures Share Issuance/Repurchase Debt issuance/repurchase Other Cash Flow Items** Change in cash Balance Sheet Cash & Equivs Bank Debt Total debt Net debt Shareholders' Equity Credit Stats Bank Debt/EBITDA Debt/EBITDA Net Debt/EBITDA EV/EBITDA EBITDA/Interest Exp. (EBITDA-Capex)/Interest Exp. Debt/Capital Net debt/Capital FCF/Debt Market capitalization Enterprise Value FY08 FY09 1Q10 2Q10 3Q10 4Q10 FY10 1Q11 2Q11 3Q11 4Q11E FY11E FY12E LTM-3Q11
19,488.0 -0.8%
18,624.7 863.3 4.4% 660.0 1,523.3 7.8% 320.0
16,301.0 -16.4%
16,021.0 280.0 1.7% 636.0 916.0 5.6% 311.0
4,270.0 20.8%
4,061.0 209.0 4.9% 159.0 368.0 8.6% 74.0
4,528.0 14.8%
4,363.0 165.0 3.6% 162.0 327.0 7.2% 77.0
4,962.0 13.2%
4,730.0 232.0 4.7% 166.0 398.0 8.0% 90.0
5,072.0 14.3%
4,905.0 167.0 3.3% 165.0 332.0 6.5% 75.0
18,832.0 15.5%
18,059.0 773.0 4.1% 652.0 1,425.0 7.6% 316.0
5,402.0 26.5%
5,084.0 318.0 5.9% 182.0 500.0 9.3% 74.0
5,620.0 24.1%
5,233.0 387.0 6.9% 192.0 579.0 10.3% 81.0
6,062.0 22.2%
5,601.0 461.0 7.6% 173.0 634.0 10.5% 86.0
5,520.4 8.8%
5,290.7 229.7 4.2% 175.0 404.7 7.3% 86.3
22,604.4 20.0%
21,208.7 1,395.7 6.2% 722.0 2,117.7 9.4% 327.3
23,258.1 2.9%
21,867.0 1,391.1 6.0% 725.0 2,116.1 9.1% 345.4
22,156.0 -20,823.0 1,333.0 6.0% 712.0 2,045.0 9.2% 316.0
(77.0) 660.0 (198.0) (1,130.0) (745.0) (1,049.0) (55.0) (1,849.0) (26.0) 5.0 387.0 (86.0) (1,569.0)
(364.0) 636.0 1,364.0 (339.0) 1,297.0 (746.0) 0.0 551.0 43.0 2.0 (619.0) 51.0 28.0
(24.0) 159.0 (57.0) 45.0 123.0 (141.0) 0.0 (18.0) 16.0 1.0 85.0 (232.0) (148.0)
39.0 162.0 (42.0) (99.0) 60.0 (217.0) 0.0 (157.0) 2.0 0.0 81.0 (17.0) (91.0)
(13.0) 166.0 (132.0) (121.0) (100.0) (260.0) 0.0 (360.0) 2.0 0.0 260.0 80.0 (18.0)
(166.0) 165.0 795.0 47.0 841.0 (326.0) 0.0 515.0 50.0 (1.0) (214.0) (10.0) 340.0
(164.0) 652.0 564.0 (128.0) 924.0 (944.0) 0.0 (20.0) 70.0 0.0 212.0 (179.0) 83.0
124.0 182.0 (721.0) (18.0) (433.0) (284.0) 0.0 (717.0) 0.0 489.0 489.0 (51.0) 210.0
56.0 192.0 (436.0) (48.0) (236.0) (248.0) (17.0) (501.0) 100.0 3.0 (21.0) 5.0 (414.0)
211.0 173.0 (537.0) (150.0) (303.0) (274.0) 10.0 (567.0) (32.0) (1.0) 958.0 (36.0) 322.0
84.1 175.0 1,014.9 (45.6) 1,228.3 (300.0) 0.0 928.3 0.0 0.0 0.0 0.0 928.3
514.1 722.0 (679.1) (261.6) 295.3 (1,106.0) (7.0) (817.7) 68.0 491.0 1,426.0 (82.0) 1,085.3
522.0 725.0 (116.0) (141.3) 989.7 (1,200.0) 0.0 (210.3) 0.0 0.0 0.0 0.0 (210.3)
225.0 712.0 (899.0) (169.0) (131.0) (1,132.0) (7.0) (1,270.0) 118.0 490.0 1,212.0 (92.0) 458.0
1,894.0 3,097.0 4,979.0 3,085.0 1,022.0
1,922.0 2,175.0 4,520.0 2,598.0 986.0
1,774.0 2,248.0 4,594.0 2,820.0 974.0
1,683.0 2,256.0 4,604.0 2,921.0 896.0
1,665.0 2,603.0 4,972.0 3,307.0 1,127.0
2,005.0 2,374.0 4,745.0 2,740.0 921.0
2,005.0 2,374.0 4,745.0 2,740.0 921.0
2,215.0 2,911.0 5,284.0 3,069.0 1,616.0
1,804.0 2,909.0 5,304.0 3,500.0 1,759.0
2,126.0 3,710.0 6,083.0 3,957.0 1,775.0
3,054.3 3,710.0 6,083.0 3,028.7 1,775.0
3,054.3 3,710.0 6,083.0 3,028.7 1,775.0
2,844.0 3,710.0 6,083.0 3,239.0 1,775.0
2,126.0 3,710.0 6,083.0 3,957.0 1,775.0
2.0x 3.3x 2.0x 4.8x 4.8x 1.5x 83% 75% -37.1% 4,297.0 7,382.0
2.4x 4.9x 2.8x 6.5x 2.9x 0.5x 82% 72% 12.2% 3,398.1 5,996.1
1.7x 3.5x 2.1x 4.5x 4.1x 3.1x 83% 74% -0.4% 3,058.9 5,878.9
1.5x 3.1x 2.0x 3.6x 4.7x 1.4x 84% 77% -3.4% 2,425.4 5,346.4
1.8x 3.4x 2.3x 4.0x 4.5x 1.5x 82% 75% -7.2% 2,601.5 5,908.5
1.7x 3.3x 1.9x 3.9x 4.5x 0.1x 84% 75% 10.9% 2,867.7 5,607.7
1.7x 3.3x 1.9x 3.9x 4.5x 1.5x 84% 75% -0.4% 2,867.7 5,607.7
1.9x 3.4x 2.0x 4.8x 4.9x 2.9x 77% 66% -13.6% 4,392.3 7,461.3
1.6x 2.9x 1.9x 4.3x 5.7x 4.1x 75% 67% -9.4% 4,241.0 7,741.0
1.8x 3.0x 1.9x 3.4x 6.5x 4.2x 77% 69% -9.3% 3,020.8 6,977.8
1.8x 2.9x 1.4x 2.9x 6.5x 1.2x 77% 63% 15.3% 3,020.8 6,049.4
1.8x 2.9x 1.4x 2.9x 6.5x 3.1x 77% 63% -13.4% 3,020.8 6,049.4
1.8x 2.9x 1.5x 3.0x 6.1x 2.7x 77% 65% -3.5% 3,020.8 6,259.7
1.8x 3.0x 1.9x 3.4x 6.5x 2.9x 77% 69% -20.9% 3,020.8 6,977.8
Capital Structure First Lien Credit Facility due 2013 EUR 400 mn Credit Facility due 2016 Pan-European A/R Facility due 2015 Chinese Credit Facilities due 2016 Other credit facilities 2nd Lien Term Loan due 2014 6.75% Sr. Notes due 2019 10.5% Sr. Notes due 2016 8.75% Sr. Notes due 2020 8.25% Sr. Notes due 2020 7.0% Sr. Notes due 2028 Other (Notes payable & overdrafts) Total Debt Less cash Net Debt
LTM Outst 200.0 524.0 537.0 370.0 538.0 1,200.0 336.0 630.0 264.0 994.0 149.0 341.0 6,083.0 2,126 3,957.0
LTM Lever. 1.1x 1.1x 1.1x 1.1x 1.1x 1.6x 3.0x 3.0x 3.0x 3.0x 3.0x 3.0x 3.0x -1.9x
FY11E Outst 200.0 524.0 537.0 370.0 538.0 1,200.0 336.0 630.0 264.0 994.0 149.0 341.0 6,083.0 3,054 3,028.7
FY11E Lever. 1.0x 1.0x 1.0x 1.0x 1.0x 1.6x 2.9x 2.9x 2.9x 2.9x 2.9x 2.9x 2.9x -1.4x
Liquidity Revolver (1st lien) - Amt Drawn - LCs Drawn Amt Unutilized Foreign credit facilities Cash Liquidity
LTM 1,500.0 200.0 415.0 885.0 1,702.0 2,126.0 4,713.0
Pension (12/31/10) Proj Benefit Oblig (PBO) Plan Assets Over/(Under)funded Market Cap PBO as a % mkt cap
US 5,641 3,714 (1,927) 164%
Int'l 2,696 2,074 (622) 78%
Total 8,337 5,788 (2,549) 3,439 242%
LT Debt Maturities 2011-2013 2014 2015 2016 2017 Thereafter
200.0 1,200.0 537.0 1,524.0 0.0 1,743.0
OPEB Status Proj Obligation Plan Assets Over/(Under)funded
12/31/10 604 7 (597)
Source: Goldman Sachs Credit Research, company reports.
22
December 13, 2011
High Yield
Building Materials: Coverage view and recommendations

Carly Mattson Goldman, Sachs & Co. carly.mattson@gs.com 1-212-902-6712 Mike Adler Goldman, Sachs & Co. mike.adler@gs.com 1-212-902-9761 We maintain our Cautious coverage view on the building materials sector. At this point, we believe market expectations for the 2012 growth trajectory have moderated to a reasonable level for most credits; however, our continued comfort in the Cautious view is simply valuation. In particular, we would highlight that our coverage universe, consisting of primarily double-B credits, has actually held in better than double-B peers since the fall sell-off: the building materials sector (ex-USG) now trades at an 120 bp premium on Zspread versus the one-year historical average of 93 bp (the sectors pre-August premium was an even smaller 85 bp). All this said, we would note that by and large our coverage universe of mainly double-B credits has adequate liquidity to wait for a recovery in demand, leaving our coverage view largely valuation, rather than catalyst, driven. Thus, increased clarity regarding a path for resolution of both sovereign debt issues and, more importantly, domestic political impasses, could improve consumer confidence: this may ultimately provide an opportunity for building materials demand in the important repair & remodel sector to grow. As a result, while we maintain our Cautious coverage view owing to relatively tight spreads and lack of catalysts for deleveraging, we recognize that these well capitalized and arguably higher quality credits could potentially become more attractive assets as 2012 progresses and we gain a greater transparency on the longer-term outlook. Exhibit 27: The building materials 10-year bond Z-spread average (ex. USG) has outperformed the double-B index for much of the last four months and so we maintain our Cautious coverage view owing to valuation
750 700 650 600

Zspread,bp
550 500 450 400 350 300 250
IG/XOBldgMat.10YearBondAvg.
IG/XOBldgMat.(exUSG)10YearBondAvg.
BBIndex
We believe the sectors five-year CDS spread averages are more fairly valued versus double-B peers than bonds. However, we would highlight that recent client short covering has caused sector spreads to tighten versus the broader market, and may provide an opportunity to buy single-name five-year CDS versus the index.
23
December 13, 2011
High Yield
Exhibit 28: Building materials five-year CDS has trended largely in line with double-B peers, but recent tightening may provide opportunities to buy single-name five-year CDS
550 500 450
Spread,bp
400 350 300 250 200 150
IG/XOBldgMat.5yearCDSAvg.
IG/XOBldgMat.(exUSG)5YearCDSAvg.
BB5YearCDSAvg.
From a fundamental perspective, we expect the stagnating domestic macro outlook (roughly 80% of the sectors demand) will remain a headwind for spread tightening and leave limited catalysts for deleveraging, particularly owing to the somewhat discretionary nature of demand for many building materials products. In particular, we recognize that our economists forecast that new housing starts in 2012 will grow 16% over 2011, to a level of 680,000. While this is a fairly attractive growth prospect against a lagging economic backdrop, we would point out that new residential demand only accounts for roughly one fifth of demand for the sector. More importantly, the forecasted growth may still be insufficient to reach break-even points for many of our building materials companies lossmaking businesses. For example, Masco has noted that it needs roughly 1.1 million to 1.3 million housing starts to be break-even in its cabinets business. Meanwhile, USG has guided that cost reductions made over the past few years, coupled with housing starts of roughly 650,000-700,000, could allow the company to break even in its key gypsum wallboard business; this suggests the company could potentially stem some if its cash burn if housing starts do reach our economists forecasts.
24
December 13, 2011
High Yield
Exhibit 29: GS economists forecast that new housing starts will grow 16% yoy in 2012, but this end market only accounts for one-fifth of total demand for our coverage universe
1.50
NewHousingStarts,millionsannualized
1.30
1.10
0.90
0.70
0.50
0.30
Source: Goldman Sachs Global ECS Research.
We anticipate that private non-residential building demand (22% of the sectors demand) will also remain challenged: the Architectural Billings Index, a key leading indicator of commercial demand 9-12 months out, has once again fallen below 50, signaling further contraction. Exhibit 30: Commercial construction indicators fail to show meaningful signs of a recovery
ArchitectureBillingsIndexand%changeincommercialconstruction
*Anyvalueabove50suggests expansionincommercialconstructionnineto12monthsout
20% 15% 10% 5% 0% -5% -10% -15% -20%

Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11 Sep-11
2007Q1 Q2 Q3 Q4 2008Q1 Q2 Q3 Q4 2009Q1 Q2 Q3 Q4 2010Q1 Q2 Q3 Q4 2011Q1 Q2 Q3 Q4 2012Q1 Q2 Q3 Q4 2013Q1 Q2 Q3 Q4
70 65 60 55 50 45 40 35 30
Non-residential construction Y/Y% Chg. (Left)
Architecture Billings Index (Right)
Source: Bloomberg.
25
December 13, 2011
High Yield
We anticipate a separate, though equally challenged, outlook for domestic federal and local public spending: we view this as the building materials end market with the most downside risk. In particular, we would highlight that the status of the federal highway spending bill remains uncertain at best, and we believe many states and municipalities may be faced with similar challenges. On the one hand, the Senate continues to push for a two-year extension of the federal highway bill at current spending levels (roughly $41 billion annually) plus inflation we would view passage of this bill as largely neutral for the sector as it would be unlikely to materially change demand. Meanwhile, the House has noted it intends to pass a five-year bill: the best case scenario, in our view, would be a long-term bill with annual funding levels at the current rate, supplemented by increased domestic energy production. This would provide increased clarity on longer-term spending sources and allow for new projects to commence. A more draconian scenario from the House would be a long-term bill with the oft-mentioned 30% cut in annual spending to match funding with anticipated revenues into the highway trust fund; we would view this as a worst-case scenario. Ultimately, we still remain somewhat skeptical that the two parties will come to a mutual agreement in a presidential election year, and so expect uncertainty regarding demand for aggregates and cement producers (where public spending can account for roughly 50% of total demand) to remain a headwind for spreads. Exhibit 31: Consumer confidence has failed to rebound to pre-recession levels, suggesting that investment in big ticket building materials items will remain elusive
100 95 90 85 80 75 70 65 60 55 50 UniversityofMichiganConsumerConfidence
Source: University of Michigan.
Finally, we expect that strong macro headwinds and weak consumer confidence could lead to further delays in repair and replacement projects. In particular, our global economics team has noted that though consumer confidence has recently trended upward, it has failed to return to pre-2008 levels. This suggests to us that a persistent drag on consumerrelated spending may remain for much of 2012.
26
December 13, 2011
High Yield
Exhibit 32: Repair and replacement demand growth also appears to be weakening
20% 15% 10% 5% 0% -5% -10% -15%
$30 $28 $26 $24 $22 $20 $18 $16 $14
Nov-99
May-05
Nov-10
Jan-98
Jun-04
Mar-07
Feb-08
Jan-09
Oct-00
Jul-03
Sep-01
Dec-98
Retail Sales of Building Materials, Garden Equipment & Garden Supply Dealers
Aug-02
Dec-09
"% change (Y/Y)"
Source: US Census Bureau, Bloomberg.
Mohawk Industries, Inc.: Own the upgrade to IG

GS Ticker MHK Rating OP Size (MM) $900 Coupon (%) 6.125 Maturity 15-Jan-16 Agency Ratings Ba1/BB+ Bid Price $106.50 YTW (%) 5.09 T-sprd (bp) 423 Z-sprd (bp) 410 G-sprd (bp) 445 CDS Levels 215/235

We view Mohawk as one of the most defensive credits in our building materials coverage universe: the catalyst for spread tightening is the credits return to full investment grade ratings (currently Ba/1BB+, Stable/Positive) over the next 12-18 months. We are comfortable that spread outperformance for MHK will continue owing to three reasons: (1) Limited event risk. We expect MHKs conservative management team will limit acquisitions to bolt-on sized opportunities that focus on higher growth, emerging market areas. (2) MHK holds low leverage and ample liquidity. We expect MHK will end 2012 with 2.2x gross leverage (1.6x net leverage) and anticipate the remainder of the credits 2012 maturity will be retired with the revolver. Meanwhile, we would highlight the company holds a $276 million cash balance, the next maturity (post 2012) is not until 2016, and we forecast MHK will continue to generate positive free cash flow. (3) MHK is the only
credit in our coverage universe where we anticipate a return to full IG ratings over
Oct-11
Apr-06
-20%
$12
Billions of Dollars
27
December 13, 2011
High Yield
the next 12 to 18 months. The key risk to our view is a larger-than-anticipated acquisition.

We expect Mohawks margins to benefit in 2012 from moderating commodity costs, and believe the credit may also profit from further market share gains. In the carpet segment, we anticipate that falling propylene prices could benefit earnings. Meanwhile, announced first quarter price increases could help offset the tail end of higher polyester costs as the industry continues to move away from nylon. These factors could leave EBIT margins stable in the low- to mid-single digits. In the Dal-Tile segment, we anticipate that MHK may continue to gain market share in the fragmented ceramic tile market. Finally, in the Unilin segment, we expect Mohawk will continue to grow its exposure to home centers, where the increased market penetration may be somewhat offset by the lower-margin nature of the home center business. We would also note that the Unilin segment does hold some European exposure, but we believe at under 16% of 2010 sales, this exposure will be more than offset by stable or improving trends within the companys other product lines.
Company description
Mohawk is a leading producer of floor covering products for residential and commercial applications in the United States and residential applications in Europe. The company holds top positions in the carpet and rug end markets (with its Mohawk segment), ceramic tile and stone (Dal-Tile segment), and hardwood flooring (Unilin segment). Exhibit 34: Mohawk Industries Financial model
($, millions)
2002 Income Statement Items Revenues EBIT EBIT Margin Interest Expense Net Income Before Unusuals Diluted EPS Before Unusuals EBITDA EBITDA Margin EBITDA/Interest Expense Cash Flow Items Cash From Operations Funds From Operations FFO/Debt Capital Expenditures Capex/DA Capex/Sales Free Cash Flow FCF/Total Debt FCF/Share Dividends FCF after Dividends Balance Sheet Items Total Debt Debt/EBITDA Debt/Capitalization Net Debt Net Debt/EBITDA Net Debt/Capitalization 4,516 512 11.3% 69 284 $4.38 614 13.6% 8.9 549 416 NA 112 110% 2.5% 437 NA $6.73 0 437 NA NA NA NA NA NA 2003 4,999 543 10.9% 55 310 $4.62 650 13.0% 11.8 309 464 46% 115 107% 2.3% 194 19% $2.89 0 194 1,012 1.6 31% 1,012 1.6 31% 2004 5,880 630 10.7% 53 368 $5.44 753 12.8% 14.2 243 541 61% 107 87% 1.8% 136 15% $2.01 0 136 891 1.2 25% 757 1.0 22% 2005 6,451 659 10.2% 68 379 $5.62 808 12.5% 11.9 561 510 15% 247 166% 3.8% 314 9% $4.65 0 314 3,308 4.1 52% 3,174 3.9 51% 2006 7,689 831 10.8% 173 442 $6.49 1,106 14.4% 6.4 783 676 24% 166 60% 2.2% 617 22% $9.06 0 617 2,784 2.5 43% 2,721 2.5 42% 2007 7,587 759 10.0% 155 438 $6.41 1,065 14.0% 6.9 875 737 32% 163 53% 2.1% 712 31% $10.42 0 712 2,281 2.1 33% 2,191 2.1 32% 2008 6,826 453 6.6% 127 249 $3.63 748 11.0% 5.9 570 491 25% 218 74% 3.2% 352 18% $5.14 0 352 1,955 2.6 38% 1,861 2.5 37% 2009 5,344 233 4.4% 127 103 $1.51 536 10.0% 4.2 672 350 19% 109 36% 2.0% 563 30% $8.21 0 563 1,855 3.5 36% 1,324 2.5 29% 2010 5,343 333 6.2% 133 173 $2.52 630 11.8% 4.7 320 487 29% 156 53% 2.9% 164 10% $2.39 0 164 1,654 2.6 34% 1,300 2.1 28% 2011E 5,582 337 6.0% 102 199 $2.89 637 11.4% 6.2 353 511 33% 280 93% 5.0% 73 5% $1.05 0 73 1,536 2.4 31% 1,218 1.9 26% 2012E 5,804 365 6.3% 95 216 $3.13 665 11.5% 7.0 399 516 34% 275 92% 4.7% 124 8% $1.80 0 124 1,536 2.3 29% 1,095 1.6 23% 2013E 6,051 401 6.6% 95 245 $3.55 701 11.6% 7.4 491 545 35% 275 92% 4.5% 216 14% $3.13 0 216 1,536 2.2 28% 879 1.3 18%
Source: Goldman Sachs Credit Research, company data.
28
December 13, 2011
High Yield
USG Corporation: Concentrated exposure to weak wallboard

GS Ticker USG Rating U Size (MM) $500 Coupon (%) 7.750 Maturity 15-Jan-18 Agency Ratings Caa1/B+ Bid Price $81.50 YTW (%) 14.40 T-sprd (bp) 1,239 Z-sprd (bp) 1,302 G-sprd (bp) 1,323 CDS Levels 11/16

We hold an Underperform rating on USG Corp. and believe the B2/B -rated credit may remain under pressure in 2012 owing to continued cash burn and a shrinking liquidity cushion. Specifically, we believe profitability in USGs key gypsum segment may
continue to be elusive in 2012 owing in large part to its direct correlation to a still challenged housing market. As a result, we forecast the companys $200 million of annual interest expense may outweigh EBITDA and erode the companys liquidity cushion from the current $883 million (including the ship mortgage and CGC credit facilities in addition to USGs primary credit facility). We would highlight that USG is the credit where our estimates differ most from the Street (suggesting further downside risk). Thus, we see further potential downside to USG bonds that do not benefit from additional subsidiary guarantees (7.75% of 2018 and 6.3% of 2016); we believe spreads could widen more, particularly if economic stagnation delays a recovery in demand for multiple years. The
key risk is that USG has two strategic investors who may be lenders of last resort if USGs liquidity cushion deteriorates further.

We expect 2012 to be characterized by more of the same: continued low gypsum utilization rates (current roughly 45%), which leave operating margins depressed and cash flows negative. We anticipate that the mid-teens growth we anticipate in housing starts may still be insufficient to push gypsum prices from below break-even levels: thus, the company will likely continue to use cash to cover essential operations. Meanwhile, the L&W supply business will likely continue to flounder owing to low volumes, but we do anticipate management will move further towards right-sizing the business via closing distribution centers and improving supply management. The silver lining for USGs earnings profile is that we do expect USG to continue to benefit from its attractive exposure to the profitable ceilings business (12% EBIT margins in 2011E), where roughly 80% of the market is controlled by USG (one-third) and Armstrong (roughly half). Ultimately, we recognize USG has an attractive debt maturity schedule, with the next maturity not until 2016, but our concern remains that the lower-rated Caa2/B- bonds could sell off further as the companys liquidity cushion erodes.
Company description
USG Corporation (USG) engages in the manufacturing and marketing of gypsum and ceiling surfaces, and in the distribution of building materials products. The company holds market-leading positions in each of its end markets. In particular, through its subsidiaries USG is the largest manufacturer of gypsum wallboard in the United States, Canada, and Mexico and controls roughly 25% of the North American gypsum market. In 2010 gypsum
December 13, 2011
High Yield
wallboard shipped by the US industry was 17.3 billion square feet, or less than half of the peak shipments of 39.6 billion square feet in 2008. USG's building products distribution segment also holds a leading position as the nation's largest specialty distributor of gypsum wallboard and other building materials. Exhibit 36: USG Financial model
($, millions)
2002 Income Statement Items Revenues EBIT EBIT Margin Interest Expense Net Income Before Unusuals Diluted EPS Before Unusuals EBITDA EBITDA Margin EBITDA/Interest Expense Cash Flow Items Cash From Operations Funds From Operations FFO/Debt Capital Expenditures Capex/DA Capex/Sales Free Cash Flow Free Cash/Debt FCF/Share Dividends Free Cash Flow After Dividends Balance Sheet Items Total Debt Debt/EBITDA Debt/Capitalization Net Debt Net Debt/EBITDA Net Debt/Total Cap 3,468 269 7.8% 8 139 $3.22 375 10.8% 46.9 445 288 NA (100) -0.9 -2.9% 345 NA $7.99 0 345 NA NA NA NA NA NA 2003 3,666 210 5.7% 6 138 $3.19 322 8.8% 53.7 249 325 NA (111) -1.0 -3.0% 138 NA $3.20 0 138 NA NA NA NA NA NA 2004 4,509 508 11.3% 5 312 $7.26 628 13.9% 125.6 428 484 NA (138) -1.2 -3.1% 290 NA $6.74 0 290 NA NA NA NA NA NA 2005 5,139 746 14.5% 5 510 $11.70 871 16.9% 174.2 506 480 NA (198) -1.6 -3.9% 308 NA $7.06 0 308 NA NA NA NA NA NA 2006 5,810 958 16.5% 207 587 $8.30 1,096 18.9% 5.3 (3,703) (2,591) (1) (393) -2.8 -6.8% (4,096) -103.5% -$57.96 0 (4,096) 2,504 2.3 62% 1,491 1.4 49% 2007 5,160 188 3.6% 69 98 $1.01 364 7.1% 5.3 1,307 265 0 (460) -2.6 -8.9% 847 21.4% $8.70 0 847 1,238 3.4 36% 511 1.4 19% 2008 4,608 (202) -4.4% 81 (228) ($2.30) (20) -0.4% -0.2 (165) (150) (0) (238) -1.3 -5.2% (403) -8.2% -$4.07 0 (403) 1,836 -91.8 52% 898 NM 34% 2009 3,235 (172) -5.3% 162 (216) ($2.18) 31 1.0% 0.2 139 (47) (0) (44) -0.2 -1.4% 95 -2.4% $0.96 0 95 1,962 63.3 68% 915 29.5 50% 2010 2,939 (150) -5.1% 179 (317) ($3.16) 28 1.0% 0.2 (94) (159) (0) (39) -0.2 -1.3% (133) -6.9% -$1.32 0 (133) 2,308 82.4 79% 1,352 48.3 69% 2011E 2,987 (117) -3.9% 206 (316) ($3.03) 48 1.6% 0.2 (91) (113) (0) (51) -0.3 -1.7% (142) -4.9% -$1.36 0 (142) 2,302 47.7 89% 1,562 32.3 84% 2012E 3,067 (77) -2.5% 202 (268) ($2.69) 83 2.7% 0.4 (93) (119) (0) (50) -0.3 -1.6% (143) -5.2% -$1.44 0 (143) 2,293 27.5 99% 1,700 20.4 99% 2013E 3,134 (33) -1.0% 202 (225) ($2.26) 127 4.1% 0.6 (76) (74) (0) (60) -0.4 -1.9% (136) -3.3% -$1.37 0 (136) 2,284 17.9 110% 1,831 14.4 112%
Source: Goldman Sachs Credit Research, company data.
30
December 13, 2011
High Yield
Cable, Satellite & Towers Coverage view and recommendations

Jason Kim Goldman, Sachs & Co. jason.kim@gs.com 1-212-902-2233 Satya Tagat Goldman, Sachs & Co. satya.tagat@gs.com 1-212-902-4427 We have a Neutral coverage view of the high yield cable, satellite & towers sector. Valuation remains tight relative to the index, but the credit fundamentals of most companies under our coverage continue to be robust, which we believe will allow the bonds to maintain their premium to the market over the first half of 2012. On a total return basis, we believe that these factors (valuation vs. strong relative fundamentals in an uncertain environment) will generally offset each other for the sector as a whole to perform in line with the overall market. 2011 was a year of pervasive worries about the economy and competitive threats to pay TV, but overall the fundamental trends remained resilient for most operators. Credit profiles of the vast majority of our covered companies have improved during the year and the commentary from management teams suggests that the trend will continue for the foreseeable future. On the M&A front, we have seen a few transactions (Insights sale to Time Warner Cable, for example) with the sellers multiples continuing to reach high single digits. We do not expect significant activity in 2012 as we expect the two largest cable MSOs Comcast and Time Warner Cable to remain focused on their recent acquisitions (NBCU for Comcast, and Insight for Time Warner Cable). We think that one of the key issues to watch for the high yield cable operators in 2012 will be their strategy on wireless. We think the recent developments between Comcast, Time Warner Cable and Verizon Wireless represent a turning point in cables wireless strategy. In essence, the two cable companies have decided against a go-it-alone strategy in wireless by selling their AWS spectrum holdings through SpectrumCo to Verizon Wireless for $3.6 billion and the companies agreeing to cross-market each others products over time. High yield cable operators have often looked to the bigger MSOs to decide on a path in wireless, and we think that companies such as Charter should be looking to enter into similar arrangements with wireless operators. Aside from Cablevision, high yield operators tend to have much smaller overlap with the telcos fiber footprint, which we believe would make the arrangements even more straightforward than those of their larger peers. Lastly, we expect DISH to play an increasingly larger role in wireless given their spectrum position. The companys 40 MHz of S-band spectrum through the purchases of DBSD and Terrestar needs additional regulatory approvals for usage, but the elimination of SpectrumCo as a potential wireless/spectrum partner after its Verizon Wireless deal means DISHs negotiating leverage has increased, in our view. Exhibit 37: HY cable/sat/towers sector total returns of 5.2% return YTD, outperforming the market by 200bp
YTD total returns: HY cable/sat/towers vs. HY market
Exhibit 38: HY cable/sat/towers trades approximately 100bp inside of the index we expect the sector to hold on to its premium in 1H2012
Yield comparison: HY cable/sat/towers vs. HY market
10.0%
8.6% 7.6%
HY Market
3.2%
8.0% 6.0% 4.0%
Cable/Sat/Towers
5.2%
2.0% 0.0%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

Source: Goldman Sachs, Bloomberg.
HY Market
Cable/Sat/Towers
31
December 13, 2011
High Yield
Cablevision: Buy CVC Corp 2020s premium asset at a discount

GS Entity CSC Hold CVC Corp Rating IL OP Size (MM) $526 $500 Coupon (%) 8.625 8.000 Priority Sr Nts Sr Nts Maturity 2/15/2019 4/15/2020 Agency Ratings Ba3/BB B1/B+ Next Call Price NC NC Date NC NC Bid Price YTW (%) STW (bp) 471 577 CDS Levels CSC Holdings, LLC. Cablevision Systems Corp. 5-Year 480 / 510 530 / 560
113.500 6.256 102.750 7.547

Cablevision Systems Corp (CVC Corp) bonds are among the highest yielding bonds in the US cable space, which investors may find surprising. Cablevision has posted several quarters of lackluster earnings given the intense competition with Verizons FiOS and the challenging economy, resulting in the CVC Corp bonds lagging both other bonds in US cable (especially Charter and Mediacom) as well as CSC Holdings bonds (CVC opco) recently. From the credit perspective, we believe that the time to own the Cablevision bonds is actually when the company is facing operational challenges and/or in a lackluster capital markets environment. We believe these factors discourage aggressive financial maneuvers that are typically at the top of investor concerns when it comes to investing in Cablevisions credit. In our view, the company is still one of the best operators in the US cable space with significant strategic value. We believe that as the management team continues to show prudence in allocating capital and the company anniversaries against difficult comps in margins, the CVC Corp bonds will outperform the sector over the next few quarters and we recommend investors buy the CVC Corp 8s of 2020 at 103.25 yielding 7.5%.
Exhibit 40: CVC Corp bonds at the wides relative to CSC Holdings bonds
Yield differential between CVC Corp 8s of 2020 and CSC Holdings 7.625s of 2018
200 bp 160 bp
Exhibit 41: as well as relative to CHTR and MCCC bonds

Yield differential between CVC Corp 8s of 2020 and CHTR 7s of 2019/MCCC 9.125s of 2019
150 bp 100 bp 50 bp
120 bp 80 bp
0 bp (50 bp) (100 bp)
40 bp 0 bp 1/1/2011
(150 bp) (200 bp)
3/1/2011
5/1/2011
7/1/2011
9/1/2011
11/1/2011
CVC Corp 8s of 2020 minus CSC Hold 7.625s of 2018
(250 bp) 1/5/2011
3/5/2011
5/5/2011
7/5/2011
9/5/2011
11/5/2011
CVC 8s of 2020 minus CHTR 7s of 2019 CVC 8s of 2020 minus MCCC 9.125s of 2019
Source: Goldman Sachs, Bloomberg
32
December 13, 2011
High Yield
We believe that another way to take advantage of this theme is through CDS. Specifically, we find value in the CSC Holdings (CVC opco) 5-year CDS relative to the Windstream (WIN) 5-year CDS. At current trading levels, investors can sell CSC Holdings 5-year at 480 bp and buy WIN 5-year at 450 bp for a positive carry of 30 bp. We believe this relationship fails to capture the long-term competitive positioning of cable compared to the RLECs. Through the CSC Holding level, net leverage stands at 3.2x compared to 3.6x for WIN pro forma for the recently closed PAETEC acquisition. While CVCs earnings have been choppy as of late, we believe this is offset by the strong credit profile and WIN facing execution risk with respect to the PAETEC deal. We also note that the CSC Holdings intermediate and longdated bonds trade over 100bp through the WIN bonds. In our view, CSC Holdings CDS
should trade 50bp inside of WIN CDS, which would represent 80-90 bp of upside in the trade in addition to the positive carry.
Exhibit 42: CSC Holdings vs. Windstream comparison
Leverage, bond yield/spread, CDS levels
(1)
CSC Holdings
3.5x LTM Gross Leverage LTM Net Leverage 3.2x Ratings Ba3/BB (2) 2018 Bond Yield / Spread 5.82% / 449 bp (3) 2021 Bond Yield / Spread 6.24% / 422 bp 5-Year CDS 480 / 510
WIN
Difference
(0.2x) (0.4x) NA
3.7x 3.6x
Ba3/B+ 6.44% / 564 bp (62 bp) / (115 bp) 7.57% / 598 bp (131 bp) / (176 bp) 420 / 450 60 bp
(1) Pro forma for the recently closed PAETEC acquisition. (2) 2018 Bonds refer to 7.625% notes for CSC Holdings and 8.125% notes for WIN. (3) 2021 Bonds refer to 6.750% notes for CSC Holdings and 7.750% notes for WIN. Source: Company data, Goldman Sachs Research estimates.

Key risks to our views on Cablevision include significant capital return to equity holders, large acquisitions, and further deterioration in margin trends owing to competitive pressure.

The Restricted Group (legacy cable and Lightpath) adjusted EBITDA (excluding the $16 million of costs related to Hurricane Irene) came in at $562 million, $35 million or 5.9% below our $597 million estimate. Management cited increased programming costs and higher marketing costs for the EBITDA performance we attribute most of the miss relative to our model on more aggressive marketing as programming cost inflation is not a new phenomenon. Margins at the legacy cable segment (excluding Lightpath) have been contracting for the past four quarters, but we believe the decline in 3Q2011 was particularly pronounced given the heavy spending to drive volume. For 2012, we look for Cablevisions legacy cable segment to record 29k data net adds, 22k phone net adds and 0.5k digital net adds, while we expect video subscribers to decline by 44ksubs. We forecast ARPU to be $157.94 for the year (up 2.3% yoy), leading to $5.87 billion in revenues (up 1.0%). We expect 2012 Restricted Group adjusted EBITDA of $2.31 billion, up 0.7% yoy (we forecast adjusted EBITDA growth of 1.3% in 2012 excluding Hurricane Irene-related costs in
33
December 13, 2011
High Yield
2011). Based on these estimates, we expect 2012 gross and net leverage through the CSC Holdings to be 3.2x and 2.7x, respectively. Through the CVC Corp bonds, we expect 2012 gross and net leverage of 4.1x and 3.7x, respectively.
Company description
Cablevision Systems Corporation is a publicly traded holding company (Ticker: CVC). Cablevision operates its businesses through its CSC Holdings, Inc. (CSC Holdings) subsidiary. CSC Holdings is the fifth-largest cable operator in the US based on the number of basic video subscribers (2.95 million subs), serving in and around the NYC metropolitan area. In addition, through its wholly owned subsidiary Cablevision Lightpath, Inc., CSC Holdings provides telephone services and high-speed Internet access to the commercial/business market. CVC also owns Bresnan Broadband Holdings, LLC, which owns cable systems in Montana, Wyoming, Colorado and Utah serving approximately 302k video subscribers. For financing purposes, Cablevision is structured as a Restricted Group (cable operations and Lightpath) and an Unrestricted Group (principally Bresnan).
34
December 13, 2011
High Yield
Exhibit 43: Cablevision consolidated summary financials

($, millions)
2009A Revenues: Legacy CVC Cable (Restricted Group) YoY % Change Bresnan YoY % Change Rainbow Media (RNS+Other Rainbow) Madison Square Garden (MSG) All Other Intersegment Eliminations Total CVC Revenues, Net YoY % Change Adjusted EBITDA: Legacy CVC Cable (Restricted Group) YoY % Change EBITDA Margin Bresnan YoY % Change EBITDA Margin Rainbow Media (RNS+Other Rainbow) Madison Square Garden (MSG) All Other Total CVC Adjusted EBITDA YoY % Change EBITDA Margin Cash Flow from Operations Less : Capital Expenditures FCF = CFO - Capital Expenditures FCF % Debt Less : Dividends Less : Share Repurchases FCF - Dividends FCF % Debt (Post Dividends/Sh Rep) Adjusted EBITDA Less : Cash Interest Expense Less : Cash Taxes Less : Changes in Working Capital Less : Capital Expenditures EBITDA-Int-Tax-WK-Capex-Div Less : Dividends Paid Less : Share Repurchases EBITDA-Int-Tax-WK-Capex-Div-Sh Rep BALANCE SHEET SUMMARY Cash & Cash Equivalents Restricted Group: Revolver Term Loans Nts Payable / Capital Leases CSC Hold Sr Nts CSC Hold Guarantee of Newsday Debt CVC Sr Nts CVC Mirror Nts (to Newsday) Total RG Debt Bresnan Broadband Holdings: Revolver Term Loans Sr Nts Total Bresnan Debt Other Entities: Rainbow National Services Newsday LLC Notes Payable / Capital Leases Total Other Entities Debt Consolidated CVC Debt LEVERAGE RG Bank Leverage RG CSC Holdings Sr Nts Leverage RG CVC Corp Sr Nts Leverage - Adjusted RG CVC Corp Sr Nts Leverage - Indenture BBH Bank Leverage BBH Sr Nts Leverage Consolidated CVC Gross Leverage Consolidated CVC Net Leverage Shares Outstanding Price/Share Equity Market Capitalization Minority Interest TEV TEV / Consolidated EBITDA $5,432 5.2% 1,043 1,062 424 (188) $7,773 7.5% $2,202 8.2% 40.5% 315 123 (88) $2,579 12.2% 33.2% 1,638 (810) $827 7.4% (123) $704 6.3% 2,579 (710) (19) (175) (810) $864 (123) $740 $355 50 4,019 3,240 650 1,900 682 $10,541 1,221 650 41 $1,912 $11,121 1.8x 3.6x 4.4x 4.7x 4.3x 4.2x 302 $25.82 $7,798 12 $18,576 7.2x 2010A $5,713 5.2% 22 1,078 466 (49) $7,231 (7.0%) $2,365 7.4% 41.4% (7) 403 (180) $2,581 0.1% 35.7% 1,696 (840) $855 6.8% (141) (300) $414 3.3% 2,581 (736) (37) (83) (840) $885 (141) (300) $444 $394 695 3,654 3,240 650 2,177 754 $11,170 765 250 $1,015 1,115 650 37 $1,801 $12,583 1.8x 3.5x 4.4x 4.7x 5.2x 6.9x 4.6x 4.5x 295 $33.84 $9,990 15 $22,193 8.6x 1Q11A $1,444 2.7% 115 273 102 (12) $1,922 9.7% $584 3.5% 40.5% 36 31.4% 100 (60) $661 8.3% 34.4% 425 (133) $292 2.3% (38) (251) $4 2Q11A $1,461 1.7% 117 116 (6) $1,689 (6.3%) $590 (4.9%) 40.4% 34 29.4% (52) $573 (15.4%) 34.0% 315 (213) $102 1.0% (42) (144) ($83) 3Q11A $1,445 0.8% 118 109 (6) $1,666 (7.8%) $526 (11.1%) 36.4% 37 31.6% (45) $539 (18.5%) 32.4% 315 (229) $86 0.8% (41) (94) ($49) 4Q11E $1,464 1.9% 121 119 (5) $1,699 (9.1%) $579 (1.6%) 39.5% 38 31.1% (50) $566 (10.4%) 33.3% 395 (209) $187 1.7% (41) (80) $66 2011E $5,814 1.8% 470 273 446 (29) $6,975 (3.5%) $2,280 (3.6%) 39.2% 145 30.9% 100 (207) $2,340 (9.4%) 33.5% 1,451 (783) $668 6.2% (162) (568) ($63) (0.6%) 2,340 (691) (28) (135) (783) $703 (162) (568) ($27) $836 3,783 3,170 650 2,177 754 $10,534 757 250 $1,007 650 29 $679 $10,816 1.6x 3.3x 4.3x 4.6x 5.2x 6.9x 4.8x 4.5x 274 $14.94 $4,097 15 $14,092 6.0x 1Q12E $1,461 1.2% 122 99 (5) $1,676 (12.8%) $571 (2.3%) 39.1% 37 30.5% (44) $565 (14.6%) 33.7% 378 (176) $203 1.9% (40) (80) $82 2Q12E $1,473 0.8% 123 113 (5) $1,703 0.9% $583 (1.3%) 39.6% 37 30.5% (50) $570 (0.5%) 33.5% 412 (175) $237 2.2% (44) (80) $114 3Q12E $1,458 0.9% 123 106 (5) $1,681 0.9% $573 9.0% 39.3% 38 30.9% (47) $564 4.7% 33.6% 395 (183) $212 2.0% (43) (80) $89 4Q12E $1,481 1.2% 126 116 (5) $1,718 1.1% $584 0.8% 39.4% 40 31.3% (51) $572 1.0% 33.3% 431 (182) $249 2.4% (42) (80) $127 2012E $5,873 1.0% 494 5.0% 433 (22) $6,778 (2.8%) $2,311 1.4% 39.3% 152 4.7% 30.8% (192) $2,271 (2.9%) 33.5% 1,616 (716) $900 8.5% (168) (320) $412 3.9% 2,271 (621) 8 (716) $943 (168) (320) $454 $984 3,706 3,022 650 2,150 754 $10,282 750 250 $1,000 650 24 $674 $10,552 1.6x 3.2x 4.1x 4.4x 4.9x 6.6x 4.6x 4.2x 254 $14.94 $3,792 15 $13,376 5.9x 2013E $5,956 1.4% 516 4.6% 424 (22) $6,875 1.4% $2,338 1.2% 39.2% 158 3.9% 30.6% (167) $2,329 2.5% 33.9% 1,704 (696) $1,008 10.3% (171) (320) $517 5.3% 2,329 (568) 3 (696) $1,068 (171) (320) $577 $689 3,556 3,022 2,150 754 $9,482 742 250 $992 19 $19 $9,740 1.5x 2.8x 3.7x 4.1x 4.7x 6.3x 4.2x 3.9x 233 $14.94 $3,488 15 $12,554 5.4x
661 (205) (12) (36) (133) $276 (38) (251) ($13) $610 1,020 3,617 3,240 650 2,177 754 $11,458 763 250 $1,013 1,052 650 35 $1,738 $12,805 2.0x 3.7x 4.6x 5.0x 5.3x 7.0x 4.7x 4.4x 289 $34.61 $10,016 14 $22,225 8.4x
573 (160) (7) (31) (213) $163 (42) (144) ($23) $357 3,579 2,915 650 2,177 754 $10,074 761 250 $1,011 650 30 $680 $10,362 1.5x 3.0x 4.0x 4.3x 5.5x 7.3x 4.6x 4.4x 285 $25.34 $7,230 16 $17,251 7.5x
539 (170) (9) (68) (229) $64 (41) (94) ($72) $189 3,542 2,852 650 2,177 754 $9,974 759 250 $1,009 650 30 $680 $10,260 1.6x 3.2x 4.2x 4.6x 5.1x 6.8x 4.6x 4.5x 279 $15.73 $4,396 15 $14,482 6.7x
566 (157) (0) (209) $201 (41) (80) $80 $836 3,783 3,170 650 2,177 754 $10,534 757 250 $1,007 650 29 $679 $10,816 1.6x 3.3x 4.2x 4.5x 5.0x 6.7x 4.8x 4.5x 274 $14.94 $4,097 15 $14,092 6.2x
565 (156) (13) (176) $220 (40) (80) $100 $896 3,764 3,170 650 2,177 754 $10,514 755 250 $1,005 650 28 $678 $10,794 1.6x 3.3x 4.3x 4.6x 5.1x 6.8x 4.8x 4.4x 269 $14.94 $4,019 15 $13,931 6.2x
570 (176) 13 (175) $232 (44) (80) $109 $813 3,745 3,022 650 2,150 754 $10,321 754 250 $1,004 650 27 $677 $10,597 1.6x 3.2x 4.1x 4.4x 5.0x 6.7x 4.7x 4.4x 264 $14.94 $3,942 15 $13,741 6.0x
564 (136) (10) (183) $236 (43) (80) $113 $880 3,725 3,022 650 2,150 754 $10,301 752 250 $1,002 650 25 $675 $10,575 1.6x 3.2x 4.2x 4.5x 4.9x 6.6x 4.7x 4.3x 259 $14.94 $3,866 15 $13,577 6.0x
572 (153) 18 (182) $255 (42) (80) $133 $984 3,706 3,022 650 2,150 754 $10,282 750 250 $1,000 650 24 $674 $10,552 1.6x 3.2x 4.1x 4.4x 4.7x 6.3x 4.6x 4.2x 254 $14.94 $3,792 15 $13,376 5.8x
(1) Beginning 4Q10, "All Other" includes News 12 networks and Rainbow Advertising Sales Corporation, which were previously included in Rainbow Media. For all periods, "All Other" also includes Newsday, Clearview theaters and corporate. (2) Working capital includes amortization of film inventory and deferred carriage fees. Source: Goldman Sachs Credit Research.
35
December 13, 2011
High Yield
Chemicals: Coverage view and recommendations

Kristen McDuffy Goldman, Sachs & Co. kristen.mcduffy@gs.com 1-212-357-6157 Adam Goodwin Goldman, Sachs & Co. adam.goodwin@gs.com 1-212-902-0459 We maintain our Neutral coverage view of the commodity chemical space, as we believe that the 8.7% weighted average yield for the sector is appropriate relative to the broader high yield market, which currently trades around 8.6%. We expect that performance among commodity chemical companies will soften in 2012 compared to the elevated levels of 2011. Still, we believe that overall results, specifically for North American producers, will remain relatively strong from a historical perspective, barring greater-than-anticipated deterioration in the macroeconomic environment. Moreover, our expectation of weaker performance in 2012 is balanced by the fact that most commodity chemical companies have relatively low leverage, ample liquidity, and few near-term debt maturities. Throughout the first half of 2011, commodity chemical companies benefitted from very favorable market fundamentals, which drove operating results to the highest levels seen in recent years. This robust performance was primarily attributable to a relatively tight supply-demand balance throughout the ethylene chain, which allowed producers to operate at high utilization rates, exerting upward pressure on product prices. North American commodity chemical companies also enjoyed a regional cost advantage in 2011 due to a favorable oil-to-gas ratio (i.e., the advent of shale gas in North America made natural-gas based feedstocks, particularly ethane, cheap relative to naphtha). Given the combination of high prices and relatively low input costs, margins among North American producers achieved multi-year highs. Even in Europe, where most ethylene production continues to be naphtha-based, commodity chemical companies realized relatively high margins despite increased feedstock costs, driven by strong co-product netbacks due to higher prices for heavier materials (i.e., propylene, butadiene, and xylenes) on tight supply conditions related to the global shift towards lighter cracking. Notwithstanding better-than-expected results across the commodity chemical sector in 1H2011, performance began to slow in late 3Q, reflecting softer demand due to the global economic slowdown, tightening financial policy in China, and inventory destocking throughout the ethylene supply chain. These weaker demand trends pressured polyethylene and co-product prices. The impact of lower pricing was compounded by higher production costs due to increased ethane prices; as a result, overall ethylene chain margins contracted from the elevated levels seen earlier in 2011. Looking into 2012, we expect the weaker demand environment for commodity chemicals to persist, given our expectation of a continued economic slowdown consistent with the view of Goldman Sachs economists, who are forecasting that global GDP will decline to 3.2% from 3.8% in 2011. We expect polymer and co-product prices to recover off of their recent lows in early 2012, as inventory destocking runs its course and customers return to the market ahead of a number of planned cracker maintenance outages in 1Q2012. However, pricing for most products will likely be lower on a year-over-year basis, particularly in 1H2012, while ethane cash costs are expected to remain elevated, reflecting ethane market tightness due to incremental demand from the petrochemical industry related to continued feedstock lightening, as well as supply constraints stemming from insufficient NGL pipeline capacity. Despite recent increases in fractionation capacity, limited pipeline infrastructure to transport NGLs from the mid-Continent to the Gulf Coast has created supply bottlenecks, pushing Mt. Belvieu, Texas, ethane prices well above the Conway, Kansas, price (price differential is currently $0.45/gallon versus $0.25/gallon in 2Q2011). Given that most of the planned pipeline capacity additions are not scheduled to come online until mid- to late 2013, we expect the ethane market to remain tight and prices elevated over the near term. Based on our expectation of lower pricing and higher cash costs, we believe that ethylene chain margins will decline in 2012, albeit for North American producers, to levels that should still be relatively strong from a historical standpoint. For context, Chemical
December 13, 2011
High Yield
Data forecasts that US ethylene margins based on ethane cracking economics will fall to $0.16/pound in 2012 from $0.21/pound in 2011; however, as illustrated in Exhibit 1, despite this decline, margins should continue to be above the average levels of the past decade, primarily due to more favorable ethane-based cracking economics today relative to the historical norms. Exhibit 44: US ethylene via ethane cracking historical and estimated economics
Operating Year 2013E 2012E 2011E 2010 2009 2008 2007 2006 2005 2004 2003 Rate (%) 90.3% 90.4% 89.7% 90.3% 83.0% 78.0% 89.9% 90.0% 84.6% 90.6% 80.7% Net Raw Materials ($/lb) 0.05 0.04 0.05 0.04 0.04 0.08 0.06 0.07 0.06 0.05 0.04 Other Variable Costs ($/lb) 0.26 0.31 0.25 0.19 0.17 0.31 0.28 0.23 0.22 0.18 0.14 Fixed Costs ($/lb) 0.05 0.04 0.04 0.04 0.05 0.05 0.04 0.04 0.04 0.04 0.04 Cash Costs ($/lb) 0.35 0.40 0.33 0.27 0.25 0.43 0.38 0.32 0.32 0.26 0.22 Selling Price ($/lb) 0.55 0.56 0.54 0.46 0.34 0.59 0.49 0.49 0.45 0.35 0.30 Margin ($/lb) 0.20 0.16 0.21 0.19 0.09 0.16 0.11 0.17 0.13 0.09 0.07
Source: Chemical data, Goldman Sachs Credit Research.
For European commodity chemical companies, we expect the year-over-year decline in performance for 2012 to be more severe compared to their North American counterparts, primarily due to a less competitive cost position, a weaker economic outlook for the region, and recent declines in co-product credits. Our Goldman Sachs commodity research team expects Brent crude prices to rise throughout 2012, implying higher feedstock costs for European crackers (recall that most European production is naphtha-based). Moreover, prices for heavier co-products such as butadiene and propylene have fallen precipitously, and despite our expectation of some recovery in pricing in early 2012, we believe that overall co-product credits will be well below prior-year levels. Separately, we maintain our Neutral coverage rating of the specialty chemical space. The weighted average yield for specialty chemical bonds is approximately 9.7%, wide of the 8.6% yield for the broader high yield market. In our view, this is warranted, given relatively high leverage among many specialty chemical companies, and increased uncertainty regarding the global economic outlook and ongoing European sovereign debt crisis. Although most specialty chemical companies should perform relatively well assuming continued strong growth in the emerging markets, a modest economic slowdown in the United States, and a mild recession in Europe, we believe that careful credit selection is paramount at this juncture. Ultimately, the chemical space is highly cyclical, and in our view, elevated leverage metrics heighten downside risk in the event of worse-thanexpected economic growth or unanticipated outcomes in Europe. Results among specialty chemical companies were mixed in 2011; while demand for specialty chemicals was generally strong throughout 1H2011, margins for many companies came under pressure as a result of raw material cost inflation. Notably, many specialty chemical companies consume heavier raw materials, which were in relatively short supply throughout much of 2011 due to strong demand and the structural, secular shift towards lighter cracking in North America. These trends reversed course, however, in late 3Q2011, as demand for specialty chemicals began to soften as a result of the global economic slowdown and significant inventory destocking throughout most chemical chains. Meanwhile, declining prices for heavier co-
37
December 13, 2011
High Yield
products eased cost pressures and enabled margin recovery for some specialty chemical companies. We anticipate modest year-over-year growth across the specialty chemical space in 2012, though we believe there will be continued differentiation among specialty companies based on their individual pricing power, end market exposures, and geographic sales mix. In our view, overall demand for specialty chemicals should grow modestly in 2012 in line with, or in excess of (depending on the specific product line) our economists 3.2% global GDP forecast. However, specialty companies with greater exposure to Europe will likely demonstrate more modest improvement (if not year-over-year declines) owing to a less favorable economic outlook for the region. We expect some degree of margin improvement across the specialty chemical space, particularly in 1H2012, given the fact that specialty pricing tends to be sticky in periods of declining raw material costs. However, we believe that margins could come under renewed pressure as the year progresses, as rising oil prices and a potential recovery in co-product pricing could push costs higher for specialty producers. As illustrated throughout 2011, given the lead-lag dynamic between cost increases and price increases, raw material inflation often results in temporary margin compression, though true specialty companies generally have success recovering costs over time.
CF Industries: Bonds offer near-term crossover opportunity

Exhibit 45: Benchmark securities
GS TKR CF CF Rating OP OP Size (MM) 800 800 Coupon (%) 6.875 7.125 Priority Sr. Nts Sr. Nts Maturity 1-May-18 1-May-20 Agency Ratings Ba1/BB+ Ba1/BB+ Next Call Price MW MW Date Bid Price 114.75 117.88 YTW (%) 4.21% 4.54% ZSPW 256 256
Source: Company reports, Goldman Sachs Credit Research.

We believe that the CF 6.875% notes of 2018 and the 7.125% notes of 2020 are poised to outperform in 2012, as we continue to see incremental upside from a potential IG upgrade (note that Fitch already rates the bonds BBB-). In our view, CF has already met the key requirements that the agencies have identified as necessary for an upgrade: Amending the credit facility to permit the release of collateral and providing clarity on expected uses of cash over the next several years. Given S&Ps positive outlook on the credit, we believe that it could upgrade CF to BBB- over the near term. Though Moodys could potentially be slower to act, we think that an upgrade by either one of the two agencies would be a significant catalyst for tightening in CF bonds, because in the event of such an upgrade, the bonds would be eligible for entry into the investment grade index (IG ratings from 2 of the 3 agencies are necessary). We believe this would expand the universe of investors that could own or perhaps would be required to own CFs bonds, while also causing them to trade on a spread basis. In turn, we would expect the bonds to tighten to trade more in line with comparable investment grade fertilizer bonds such as the Agrium 6.75s of 2019. Given current trading levels for CFs bonds, we see at least an additional 3 to 5 points of upside on the back of a potential IG upgrade. The key risk to our view, however, is lack of ratings action by the credit agencies.
38
December 13, 2011
High Yield
Exhibit 46: CFs bonds still trade well wide of comparable investment grade comps
Company CF Industries CF Industries Mosaic Agrium Potash Coupon 6.875% 7.125% 3.750% 6.750% 4.875% Maturity 5/1/2018 5/1/2020 11/15/2021 1/15/2019 3/30/2020 Rating Ba1/BB+ Ba1/BB+ Baa1/BBB Baa2/BBB Baa1/ABid Px 114.75 117.88 99.31 120.85 112.77 YTW 4.21% 4.54% 3.83% 3.42% 3.12% LTM through layer Z-Spread Leverage Net leverage 256 0.6x 0.4x 256 0.6x 0.4x 160 0.3x 0.0x 162 1.0x 0.7x 111 1.1x 1.0x LTM EBITDA Margin 48% 48% 32% 17% 49%

CF Industries reported 3Q2011 adjusted EBITDA of $682 million a new quarterly record compared to $259 million in the prior-year period. The significant year-over-year improvement in results primarily reflected a substantial increase in the companys gross margins on higher nutrient prices, as well as higher volumes for both nitrogen and phosphate products. CF generated roughly $783 million of free cash flow during the period a new record for any quarter in its history. We believe that the outlook for CF is highly favorable, as a confluence of fundamental factors are perfectly aligned to create a sustained period of strong earnings and free cash flow. The US Department of Agriculture estimates that the corn stocks-to-use ratio will finish 2011 at 6.8% the second-lowest level in 40 years. These tight supply conditions, coupled with robust demand for food, feed and fuel, should continue to support relatively high corn prices over the next several years. In turn, high corn prices should incentivize farmers to dedicate more acres to the crop: CF projects that US farmers will plant 93.5 million acres of corn in 2012, an increase of 1.6 million acres versus 2011. In addition, high crop prices have improved farm profitability, causing fertilizers to become more affordable and increasing application rates. Fertilizer costs as a percentage of revenue for corn remain well below the five-year average, giving farmers the incentive to apply fertilizers more liberally to replenish soil nutrient levels. Thus, we expect the impact of larger planted acreage to be compounded by higher application rates, driving increased demand for fertilizers and exerting upward pressure on prices. At the same time, prices should also be supported by relatively tight supply conditions for both nitrogen and phosphates. In addition to the favorable backdrop for demand and pricing, the outlook for the fertilizer industryand specifically for CFs core nitrogen segmentis further supported by historically low natural gas prices. The Henry Hub spot price is currently around $3.49 per MMBtu, with the 12- and 24-month strips trading at $3.81 and $4.11, respectively. We expect the combination of high fertilizer prices and low natural gas costs to bolster margins over the next several years. Given these positive trends, we expect FY2012 adjusted EBITDA will rise to $3,197 million from an estimated $3,001 million in FY2011. At this high level of profitability, we believe that CF will generate significant free cash flow even after accounting for the companys increased capital investment plans and potential share repurchases.
Company description
CF Industries is the largest producer of nitrogen fertilizers in North America and the thirdlargest public producer of phosphate fertilizers globally. The companys principal products are ammonia, urea, urea ammonium nitrate, ammonium nitrate, diesel exhaust fluid, diammonium phosphate and monoammonium phosphate. CFs core markets and
December 13, 2011
High Yield
distribution facilities are concentrated in the Midwestern US grain-producing states and other major agricultural areas of the United States and Canada. On April 15, 2010, CF acquired Terra Industries, another leading fertilizer company, for $4.7 billion.
40
December 13, 2011
High Yield
Exhibit 47: CF Industries Financial model

($, millions)
FY:08 Income Statement Net sales Cost of sales SG&A Other operating expenses EBITDA Fee paid to Yara Peru project development costs Mark-to-market on derivative contracts Gain on sale of Terra shares Inventory write-downs Phantom share addback Gain on sale of assets Merger costs Adjusted EBITDA Depreciation & Amortization EBIT Net interest income (expense) (2) Restructuring and integration costs Loss on extinguishment of debt Other non-operating Income taxes Equity in affiliates Equity in non-operating affiliates Minority interests Net Earnings Cash Flow Items EBITDA Distributions from affiliates Distributions to minority interest EBITDA + Distributions Cash interest Cash taxes Funds from Operations Change in working capital Cash from Operations Capital Expenditures Dividends Free Cash Flow Other Inc. (Dec.) in Cash Asset sales (purchases) Purchases (sales) of marketable securities Stock issuance (repurchase) Debt issued (repaid) Transaction costs Other cash inflows (outflows) Change in Cash Balance Sheet Items Cash Customer advances Short-term debt Long-term debt Total Debt Minority interests Preferred stock Shareholder's Equity Total Book Capitalization Common shares out (millions) Share Price Enterprise Value Credit Ratios LTM EBITDA LTM EBITDA Margin LTM EBITDA/Interest PF LTM Debt/EBITDA (3) PF LTM Net Debt/EBITDA LTM historical Debt/EBITDA LTM historical Net Debt/EBITDA 6,812.6 (4,529.0) (138.7) (4.5) 2,140.3 1.2 63.8 57.0 1.7 2,264.0 (179.7) 2,084.4 20.5 (29.4) (697.8) 156.0 (184.6) 1,225.4 FY:09 4,189.8 (2,778.3) (130.0) (114.7) 1,166.8 89.3 (87.5) (11.9) 29.3 4.6 18.0 1,208.6 (185.8) 1,022.8 (24.7) (53.3) (320.3) 30.8 (108.9) 504.5 Q4:10 1,237.6 (663.6) (32.8) (15.8) 525.4 0.4 (31.4) 494.4 (90.1) 404.3 (50.2) (3.7) 0.2 (169.3) 3.4 11.0 (26.4) 200.3 FY:10 4,373.9 (2,774.5) (129.3) (170.0) 1,300.0 136.1 5.9 (7.2) 19.4 9.0 1,463.2 (315.1) 1,148.2 (223.6) (21.6) (17.0) 27.5 (305.5) 35.7 26.6 (106.5) 400.6 Q1:11 1,174.0 (553.6) (31.0) 31.0 620.4 (0.7) (32.5) 587.2 (95.4) 491.8 (51.8) (2.1) 0.3 (158.8) 11.5 8.5 (50.6) 282.0 Q2:11 1,801.7 (843.6) (31.7) (3.9) 922.5 0.5 14.2 (2.0) 935.2 (90.7) 844.5 (29.9) (1.3) 0.2 (281.0) 14.2 9.8 (56.4) 487.4 Q3:11 1,403.8 (666.1) (30.5) (39.4) 667.8 0.2 14.1 682.1 (99.7) 582.4 (31.8) (0.8) 0.1 (184.9) 15.0 16.7 (51.5) 330.9 Q4:11E 1,695.5 (857.6) (31.0) (10.0) 796.9 796.9 (99.7) 697.2 (31.8) (232.9) 10.0 10.0 (59.9) 392.6 LTM 5,617.1 (2,726.9) (126.0) (28.1) 2,736.1 1.1 (3.8) (34.5) 2,698.9 (375.9) 2,323.0 (163.7) (7.9) 0.8 (794.0) 44.1 46.0 (184.9) 1,308.5 FY:11E 6,075.0 (2,920.9) (124.2) (22.3) 3,007.6 0.7 27.6 (34.5) 3,001.4 (385.5) 2,615.9 (145.3) (4.2) 0.6 (857.6) 50.7 45.0 (218.4) 1,492.9 Q1:12E 1,350.1 (580.0) (31.0) (10.0) 729.1 729.1 (99.7) 629.4 (31.8) (209.1) 10.0 10.0 (53.8) 354.6 Q2:12E 1,981.9 (910.3) (31.0) (10.0) 1,030.6 1,030.6 (99.7) 930.9 (31.8) (314.7) 10.0 10.0 (80.9) 523.5 Q3:12E 1,333.6 (612.5) (31.0) (10.0) 680.1 680.1 (99.7) 580.4 (31.8) (192.0) 10.0 10.0 (49.4) 327.2 Q4:12E 1,610.7 (812.7) (31.0) (10.0) 757.0 757.0 (99.7) 657.3 (31.8) (218.9) 10.0 10.0 (56.3) 370.3 FY:12E 6,276.3 (2,915.5) (124.0) (40.0) 3,196.8 3,196.8 (398.8) 2,798.0 (127.2) (934.8) 40.0 40.0 (240.4) 1,575.7
2,264.0 134.0 (122.3) 2,275.8 20.5 (566.6) 1,729.8 (693.4) 1,036.4 (220.9) (54.2) 761.3
1,208.6 57.0 (153.4) 1,112.2 (24.7) (290.6) 796.8 183.0 979.8 (369.6) (808.0) (197.8)
494.4 0.7 (6.5) 488.6 (50.2) (122.2) 316.2 230.3 546.5 (69.6) (7.1) 469.8
1,463.2 52.1 (117.0) 1,398.4 (223.6) (228.0) 946.8 419.0 1,365.8 (293.2) (56.2) 1,016.4 (3,171.8) 376.7 1,150.1 1,188.5 (300.0) (660.7) (400.7) 797.7 431.5 4.9 1,954.1 1,959.0 383.0 4,050.4 6,392.4 72.0 147.8 12,186.6 1,463.2 33.5% 6.5x 1.3x 1.1x 1.3x 1.1x
587.2 31.3 (6.3) 612.2 (28.7) (142.2) 441.3 262.1 703.4 (54.9) (7.1) 641.4
935.2 (22.3) 912.9 (25.8) (271.8) 615.3 (371.5) 243.8 (50.6) (7.2) 186.0
682.1 (98.8) 583.3 (29.9) (194.3) 359.1 515.5 874.6 (63.7) (28.3) 782.6
796.9 (10.0) 786.9 (31.8) (232.9) 522.2 (150.0) 372.2 (90.0) (28.3) 253.9
2,698.9 32.0 (133.9) 2,597.0 (134.6) (730.5) 1,731.9 636.4 2,368.3 (238.8) (49.7) 2,079.8
3,001.4 31.3 (137.4) 2,895.3 (116.2) (841.2) 1,937.9 256.1 2,194.0 (259.2) (70.9) 1,863.9
729.1 30.0 (10.0) 749.1 (31.8) (209.1) 508.1 150.0 658.1 (150.0) (28.3) 479.8
1,030.6 (10.0) 1,020.6 (31.8) (314.7) 674.1 (400.0) 274.1 (150.0) (28.3) 95.8
680.1 (120.0) 560.1 (31.8) (192.0) 336.3 200.0 536.3 (150.0) (28.3) 358.0
757.0 (10.0) 747.0 (31.8) (218.9) 496.3 (100.0) 396.3 (150.0) (28.3) 218.0
3,196.8 30.0 (150.0) 3,076.8 (127.2) (934.8) 2,014.8 (150.0) 1,864.8 (600.0) (113.2) 1,151.6 1,151.6 2,128.8 878.2 1,613.0 1,613.0 487.0 6,089.6 8,189.6 69.9 158.6 11,059.4 3,196.8 50.9% 25.1x 0.5x 0.1x 0.5x 0.1x 71% 20% 15% 3.5x
12.5 295.9 (657.4) 114.7 527.0 1,591.7 347.8 4.1 330.0 334.1 120.5 1.5 2,275.4 2,731.5 48.4 49.2 NA 2,264.0 33.2% -110.4x 1.2x 1.0x 0.1x 0.0x
9.5 (251.3) (3.4) 272.3 (222.5) (393.3) 1,198.4 159.5 607.1 607.1 110.4 0.5 2,108.7 2,826.8 48.6 90.8 NA 1,208.6 28.8% 48.9x 2.2x 1.9x 0.5x 0.0x
15.6 (300.0) (36.1) 149.3 797.7 431.5 4.9 1,954.1 1,959.0 383.0 4,050.4 6,392.4 72.0 147.8 12,186.6 1,463.2 33.5% 6.5x 1.3x 1.1x 1.3x 1.1x
0.5 (346.0) 40.5 336.4 1,134.1 747.3 5.1 1,613.0 1,618.1 428.5 4,363.1 6,409.7 72.1 129.3 10,231.4 1,799.2 38.8% 7.2x 0.9x 0.7x 0.9x 0.7x
24.1 11.4 221.5 1,355.6 401.3 5.1 1,613.0 1,618.1 463.3 4,868.5 6,949.9 72.2 141.6 10,948.6 2,275.4 44.4% 14.0x 0.7x 0.3x 0.7x 0.3x
12.3 (801.9) (1.5) 79.0 70.5 1,426.1 878.2 4.7 1,613.0 1,617.7 487.0 4,262.8 6,367.5 69.9 158.6 11,766.8 2,698.9 48.0% 20.1x 0.6x 0.4x 0.6x 0.4x
(698.1) (4.7) (448.9) 977.2 878.2 1,613.0 1,613.0 487.0 4,627.1 6,727.1 69.9 158.6 12,211.0 3,001.4 49.4% 25.8x 0.5x 0.5x 0.5x 0.5x
52.5 (801.9) (646.0) (1.5) 94.8 777.7 1,426.1 878.2 4.7 1,613.0 1,617.7 487.0 4,262.8 6,367.5 69.9 158.6 11,766.8 2,698.9 48.0% 20.1x 0.6x 0.4x 0.6x 0.4x
36.9 (1,500.0) (350.7) (1.5) 130.9 179.5 977.2 878.2 1,613.0 1,613.0 487.0 4,627.1 6,727.1 69.9 158.6 12,211.0 3,001.4 49.4% 25.8x 0.5x 0.5x 0.5x 0.5x
479.8 1,457.0 878.2 1,613.0 1,613.0 487.0 4,953.4 7,053.4 69.9 158.6 11,731.2 3,143.2 50.3% 26.3x 0.5x 0.3x 0.5x 0.3x
95.8 1,552.8 878.2 1,613.0 1,613.0 487.0 5,448.6 7,548.6 69.9 158.6 11,635.4 3,238.6 50.4% 25.8x 0.5x 0.3x 0.5x 0.3x
358.0 1,910.8 878.2 1,613.0 1,613.0 487.0 5,747.6 7,847.6 69.9 158.6 11,277.4 3,236.7 50.9% 25.4x 0.5x 0.2x 0.5x 0.2x 74% 21% 15% 3.5x
218.0 2,128.8 878.2 1,613.0 1,613.0 487.0 6,089.6 8,189.6 69.9 158.6 11,059.4 3,196.8 50.9% 25.1x 0.5x 0.1x 0.5x 0.1x 71% 20% 15% 3.5x
LTM Free Cash flow/Debt 518% 131% 52% 52% 86% 128% 129% 116% 129% 120% 106% 100% Total Debt/Book Capitalization 12% 21% 31% 31% 25% 23% 25% 24% 25% 24% 23% 21% Debt/Mkt. Capitalization NA NA 18% 18% 17% 16% 15% 15% 15% 15% 15% 15% EV/EBITDA NA NA 8.3x 8.3x 5.7x 4.8x 4.4x 4.1x 4.4x 4.1x 3.7x 3.6x (1) Financials are derived by summing separately filed financials of both companies. (2) Prior to its acquisition of Terra Industries, CF did not have any debt. CF's interest income more than offset Terra's interest expense, causing the interest to be a source of income rather than expense. (3) Pro forma leverage statistics represents CF EBITDA plus Terra EBITDA divided by the pro forma debt balance as fo the close of the transaction. Net leverage is based on a pro forma cash balance of $350 million.
41
December 13, 2011
High Yield
Olin: Five-year CDS trades too tight relative to Dow

GS Rating U Size (MM) 150 Coupon (%) 8.875 Priority Sr. Unsec Maturity 15-Aug-19 Agency Ratings Ba1/B+ Next Call Price Date 104.44 8/15/2014 Bid Price 108.25 YTW (%) 6.98% OAS bp 560 CDS levels Olin 5-Year 170/180

Though Olins results throughout 2011 were relatively strong, we expect the companys momentum to slow over the course of 2012, primarily due to softening chlorine demand and pricing. In addition, we expect free cash flow to be challenged over the near to intermediate term, given increased capital expenditures related to the companys ongoing mercury cell conversion and Winchester relocation. From a valuation standpoint, we think Olin five-year CDS (170/180bp) trades far too tight compared to higher-quality peers based on its ratings, leverage metrics, business profile and performance outlook. We recommend that investors combine a short position in Olin five-year CDS with a long position in Dow five-year CDS (203/213bp), which Goldman Sachs Investment Grade Credit Research analyst Carly Mattson rates Outperform. In our view, the current relationship between Olin and Dow is fundamentally mispriced, given Dows greater business diversification, significantly larger size ($33 billion market cap versus $1.5 billion for Olin), and higher credit ratings (Baa3/BBB compared to Ba1/B+ for Olin). We note that the key risks to being short Olin include better-than-expected operating performance or potential ratings upgrades.

Olin reported 3Q2011 adjusted EBITDA of $99 million, compared to $90 million in 2Q2011 and $56 million in the prior-year period. The significant year-over-year improvement in results was primarily attributable to higher ECU netbacks in the chlor-alkali business, partially offset by lower earnings from Winchester. However, towards the end of the period, the company experienced a significant falloff in demand for chlorine and chlorine derivatives, reflecting the global economic slowdown and weaker export markets. Looking into 2012, we believe that Olins recent momentum will moderate, primarily due to weaker chlorine demand, which we think will dampen overall volumes and constrain further improvement in ECU netbacks. Notably, CMAI forecasts that North American ECU margins will decline over the course of 2012, primarily due to lower pricing. At the same time, we expect limited improvement in Winchester results in 2012. Accordingly, we estimate adjusted EBITDA will grow only modestly in FY2012 to $331 million from an estimated $312 million in FY2011. In addition, we believe that Olins free cash flow will remain anemic over the next several quarters, reflecting elevated capital expenditures to fund the following projects: Converting 260kT mercury cell plant in Charleston Tennessee to 200kT of membrane capacity. This will reduce the companys chlor alkali capacity by 60kT, or 3%, and require $160 million of total capital expenditures by the completion of the project in late 2012.
42
December 13, 2011
High Yield
Discontinuing mercury-cell based chlor alkali production at Olins Augusta, Georgia, facility and reconfiguring the plant to manufacture bleach and distribute caustic soda. This should reduce Olins total chlor alkali capacity by 100Kt, or 5%. Relocating Winchester centerfire ammunition manufacturing operations to Oxford, Mississippi, from East Alton, Illinois. The company expects this move to take 5 years to complete and to require a total of $80 million of capital expenditures (roughly $30 million of which were already incurred in 2011).
Company description
Olin is the third-largest chlor alkali producer in North America. Its principal products are: Chlorine, which is used as a raw material in the production of various products with enduses including vinyls, chlorinate intermediates, and water treatment; and caustic soda a product with multiple applications such as pulp and paper, detergents, soaps and alumina. Olin also manufactures and sells other chlor alkali related products, including processed salt, hydrochloric acid, and bleach. In addition, the company has a small ammunition business, Winchester. In March 2011, Olin acquired PolyOnes 50% stake in the SunBelt chlor alkali joint venture for a total purchase price of $175 million, which represented a 5x EV/EBITDA multiple.
43
December 13, 2011
High Yield
Exhibit 49: Olin Corp. Financial model

($, millions)
FY:09 Income Statement Revenue Cost of sales SG&A EBITDA Eliminate non-cash items Pension Income Environmental Provision Adjusted EBITDA Depreciation & Amortization Other operating income EBIT Earnings of non-consolidated affiliates Other Income Interest Expense non-cash Interest income Special Charges Income Taxes Discontinued Operations Minority Interests Net Earnings Cash Flow Items EBITDA Distributions from JV EBITDA+distributions Interest Expense Cash Taxes Funds from Operations Change in working capital Cash from Operating Activities Dividends Capital Expenditures Free Cash Flow Other Inc. (Dec.) in Cash Aquisitions Proceeds from asset sales Pensions Net debt raised Stock options Net equity raised Other Cash Inflow (Outflow) Change in Cash Balance Sheet Items Cash (excluding restricted cash) Restricted cash Total cash Working Capital Short-term Debt Long-term Debt Debt guaranteed by SunBelt Total Debt including SunBelt Shareholder's Equity Total Book Capitalization Common shares out (millions of diluted) Share Price Enterprise Value Credit Ratios LTM EBITDA LTM EBITDA Margin LTM EBITDA/Interest LTM Capex/Cash flow Total Debt/EBITDA Free Cash flow/Debt Total Debt/Book Capitalization Net Debt/EBITDA Free Cash flow/Net Debt Net Debt/Book Capitalization 1,531.5 (1,151.0) (135.3) 245.2 4Q:10 385.4 (301.1) (33.1) 51.2 FY:10 1,585.9 (1,263.0) (134.4) 188.5 1Q:11 436.0 (336.0) (39.5) 60.5 2Q:11 529.1 (388.3) (42.5) 98.3 3Q:11 550.2 (407.2) (39.8) 103.2 4Q:11E LTM FY:11E 1Q:12E 549.9 (406.2) (44.0) 99.7 2Q:12E 515.5 (371.0) (41.2) 103.3 3Q:12E 522.0 (381.5) (41.8) 98.8 4Q:12E FY:12E
431.2 1,900.7 1,946.5 (313.5) (1,432.6) (1,445.0) (34.5) (154.9) (156.3) 83.2 313.2 (27.2) 2.9 288.9 (96.2) 5.8 222.8 15.6 180.4 (28.4) 1.0 (40.8) (125.6) 225.0 288.9 15.2 304.1 (28.4) (28.9) 246.8 (56.3) 190.5 (63.8) (150.3) (23.6) 345.2
398.2 1,985.6 (293.0) (1,451.7) (31.9) (158.8) 73.3 375.1
(22.3) (58.0) 164.9 (71.7) 9.1 182.6 37.7 0.2 (11.6) 1.1 (74.2) 135.8 164.9 37.1 202.0 (13.7) (39.5) 148.8 (6.2) 142.6 (62.5) (137.9) (57.8)
(6.4) 44.8 (22.1) (0.1) 29.0 7.1 1.4 (5.9) 0.3 (34.2) 4.3 2.0 44.8 14.1 58.9 (5.9) (3.7) 49.3 19.5 68.8 (15.8) (21.9) 31.1
(24.6) 9.1 173.0 (86.9) 2.5 104.1 29.9 1.5 (25.4) 1.0 (34.2) (12.1) 64.8 173.0 23.6 196.6 (24.8) 10.3 182.1 (21.3) 160.8 (63.3) (85.3) 12.2
(6.7) 1.5 55.3 (23.2) 1.4 38.7 7.0 181.2 (7.2) 0.2 (0.1) (86.1) 133.7 55.3 7.4 62.7 (7.2) (1.4) 54.1 (69.3) (15.2) (15.9) (25.6) (56.7)
(7.2) (1.1) 90.0 (25.4) 0.2 73.1 0.7 (0.6) (7.4) 0.3 (2.4) (21.6) 42.1 90.0 (6.2) 83.8 (7.4) (16.0) 60.4 (23.3) 37.1 (16.1) (37.8) (16.8)
(6.9) 2.5 98.8 (25.5) 4.3 82.0 0.8 (1.6) (7.9) 0.2 (4.1) (22.2) 47.2 98.8 (0.1) 98.7 (7.9) (7.8) 83.0 16.8 99.8 (16.0) (65.0) 18.8
(7.0) (8.0) 68.2 (25.5) 0.5 58.2 0.8 (2.0) (7.9) 0.2 (2.5) (18.2) 28.6 0.35 68.2 68.2 (7.9) (8.2) 52.1 20.0 72.1 (16.0) (125.0) (68.9)
(27.8) (5.1) 312.3 (99.6) 6.4 252.0 9.3 177.0 (30.4) 0.9 (9.1) (148.1) 251.6 312.3 1.1 313.4 (30.4) (33.4) 249.6 (55.8) 193.8 (64.0) (253.4) (123.6)
(7.0) (4.0) 88.7 (25.0) 0.5 75.2 0.8 (7.2) 0.2 (24.6) 44.5 88.7 88.7 (7.2) (19.6) 62.0 (40.0) 22.0 (16.0) (56.3) (50.3)
(7.0) (4.0) 92.3 (25.0) 0.5 78.8 0.8 (7.2) 0.2 (25.8) 46.7 92.3 92.3 (7.2) (20.8) 64.2 20.0 84.2 (16.0) (56.3) 12.0
(7.0) (4.0) 87.8 (25.0) 0.5 74.3 0.8 (7.2) 0.2 (24.2) 43.8 87.8 87.8 (7.2) (19.2) 61.3 (15.0) 46.3 (16.0) (56.3) (25.9)
(7.0) (4.0) 62.3 (25.0) 0.5 48.8 0.8 (7.2) 0.2 (15.1) 27.6 62.3 62.3 (7.2) (10.1) 45.1 30.0 75.1 (16.0) (56.3) 2.8
(28.0) (16.0) 331.1 (100.0) 2.0 277.1 3.2 (28.8) 0.8 (89.7) 162.6 331.1 331.1 (28.8) (69.7) 232.6 (5.0) 227.6 (64.0) (225.0) (61.4)
8.5 (26.3) 150.3 6.0 16.9 114.4 212.0 458.5 458.5 189.3 398.4 48.8 447.2 821.9 1,269.1 78.9 16.8 1,310.3 202.0 11% 12.0x 93% 2.2x -13% 35% 0.0x 512% -1%
0.2 (5.7) 115.2 2.2 24.2 167.2 458.6 102.0 560.6 227.0 75.0 421.0 42.7 538.7 829.7 1,368.4 80.4 19.5 1,543.5 196.6 11% 7.0x 47% 2.7x 2% 39% 0.0x 15% 6%
(31.4) 96.3 9.8 10.2 1.9 102.1 458.6 102.0 560.6 227.0 75.0 421.0 42.7 538.7 829.7 1,368.4 80.4 19.5 1,543.5 196.6 11% 7.0x 47% 2.7x 2% 39% 0.0x 15% 6%
(123.4) 1.8 (6.8) 1.7 5.2 (178.2) 280.4 99.1 379.5 317.9 89.3 491.9 581.2 949.9 1,531.1 80.4 22.9 2,044.5 227.2 12% 8.0x 42% 2.6x 1% 38% 0.9x 2% 20%
0.4 (6.4) 10.5 8.4 (3.9) 276.5 97.8 374.3 345.5 88.5 494.3 582.8 987.8 1,570.6 81.1 23.0 2,069.7 270.6 14% 9.1x 45% 2.2x -4% 37% 0.8x -7% 20%
4.0 (7.0) (0.8) 26.8 41.8 318.3 71.6 389.9 327.2 87.8 501.8 589.6 1,007.2 1,596.8 80.8 21.4 1,928.0 304.1 15% 10.2x 61% 1.9x -4% 37% 0.7x -9% 17%
(51.2) (120.1) 198.2 71.6 269.8 307.2 87.8 450.6 538.4 1,019.8 1,558.2 80.8 21.4 1,996.9 313.4 16% 10.3x 102% 1.7x -23% 35% 0.9x -36% 22%
(123.4) 6.4 (25.9) 115.2 13.6 64.6 26.9 318.3 71.6 389.9 327.2 87.8 501.8 589.6 1,007.2 1,596.8 80.8 21.4 1,928.0 304.1 16% 10.2x -61% 1.9x -4% 37% 0.7x -9% 17%
(123.4) (20.2) (51.2) 11.4 40.4 (260.4) 198.2 71.6 269.8 307.2 87.8 450.6 538.4 1,019.8 1,558.2 80.8 21.4 1,996.9 313.4 16% 10.3x 102% 1.7x -23% 35% 0.9x -36% 22%
(2.0) (52.3) 146.0 71.6 217.6 347.2 87.8 450.6 538.4 1,048.3 1,586.7 80.8 21.4 2,049.1 339.5 16% 11.2x 110% 1.6x -22% 34% 0.9x -30% 25%
(2.0) 10.0 155.9 71.6 227.5 327.2 87.8 450.6 538.4 1,079.0 1,617.4 80.8 21.4 2,039.2 347.9 17% 11.5x 116% 1.5x -16% 33% 0.9x -23% 24%
(2.0) (27.9) 128.0 71.6 199.6 342.2 87.8 450.6 538.4 1,106.9 1,645.3 80.8 21.4 2,067.1 337.0 17% 11.4x 123% 1.6x -25% 33% 1.0x -32% 25%
(2.0) (12.2) (11.4) 116.7 71.6 188.3 312.2 87.8 438.4 526.2 1,118.5 1,644.7 80.8 21.4 2,066.2 331.1 17% 11.5x 97% 1.6x -12% 32% 1.0x -15% 25%
(8.0) (12.2) (81.6) 116.7 71.6 188.3 312.2 87.8 438.4 526.2 1,118.5 1,644.7 80.8 21.4 2,066.2 331.1 17% 11.5x 97% 1.6x -12% 32% 1.0x -15% 25%
44
December 13, 2011
High Yield
Consumer & Apparel: Coverage view and recommendations

Kevin Coyne Goldman, Sachs & Co. kevin.coyne@gs.com 1-212-357-9918 Celeste Everett Goldman, Sachs & Co. celeste.everett@gs.com 1-212-902-4751 We have a Neutral coverage view on the Consumer & Apparel sector. We expect muted GDP growth, relatively low consumer confidence, and elevated unemployment will continue to place pressure on the consumer and personal consumption levels. However, we think moderating input cost inflation will help alleviate margin pressure, and we expect operators to remain vigilant with inventory management. We prefer companies that operate in more inelastic demand environments such as memory books and personal care products. Given the sluggish macroeconomic environment and increasing austerity measures in Europe, we prefer companies with more exposure to the US and faster growing Asian and Latin American economies. On the demand side, consumer confidence remains near all-time lows, although it started to show signs of a rebound in November. Additionally, we expect the Consumer & Apparel sector to face headwinds in the intermediate term as unemployment is expected to remain elevated at 9% through the end of 2012. We note that retail sales are beginning to reflect the headwinds, with October sales missing expectations for the first time in 2011 and November meeting expectations with benefits from relatively strong Black Friday sales.
School affinity products: We expect the school affinity companies will face these macro pressures in addition to rising input costs. The Goldman Sachs Global ECS team expects precious metals prices to remain elevated and in some cases increase in 2012. Gold is expected to increase 16% over the next year, to $1,940 per ounce from $1,667 today. Silver is expected to be more stable with only a 3% increase expected over the next 12 months. School affinity companies such as Visant Corp. (VISANT, In-Line) and American Achievement (AMEACH, Outperform) anticipate offsetting the projected increase in gold prices through various procurement and hedging strategies; however, the expected increase will continue to be an operational headwind. We will continue to watch for an acceleration in pricing pressure, which VISANT referenced on its 3Q2011 conference call. Personal care products: We continue to believe that businesses focused on personal care
products will be more defensive than other consumer product segments. Personal care products are considered more of a necessity than a discretionary expenditure. In addition, personal care consumers are more likely to remain loyal to their brand and less likely to trade down despite rising prices. Historically, there is less input cost inflation in this segment relative to others.
Apparel: On the apparel side, elevated cotton prices began to make their way through
company inventories in 2011. We expect this to continue through the first half of 2012 as higher cost raw materials elevate cost of goods sold. We expect this margin pressure to begin to abate in the second half of 2012 as lower cotton prices work through the operating cycle. Manufacturers were able to offset higher input costs slightly with higher ticket prices, but some companies with offerings to the middle market noted a more elastic response to price increases. We expect price increases will moderate in 2012, especially as the lower cost of cotton begins to move through the production cycle.
45
December 13, 2011
High Yield
Energy: Coverage view and recommendations

We maintain our Attractive view on the Energy sector
Jason Gilbert Goldman, Sachs & Co. jason.gilbert@gs.com 1-212-902-3585 Sarah Yanes Goldman, Sachs & Co. sarah.yanes@gs.com 1-212-357-5869
Our outlooks for oil and natural gas remain very different, much as they have for the past two years. We believe the stage is being set for crude to move higher in 2012.
However, the natural gas market continues to be in a state of persistent oversupply, and we do not expect this to change in 2012.
We are using $113/$120 per barrel WTI/Brent oil pricing for 2012, +13%/+10% from current levels. Globally, we believe the level of demand continues to rise relative to the
level of supply. For 2012 the IEA (as of November 10) is forecasting global oil demand growth of 1.5% to 90.5 mn b/d vs. oil supply growth of roughly 1%. The IEA demand growth estimate is roughly consistent with demand growth implied by our economics teams 3.2% global GDP growth figure for 2012 and using the rule of thumb (before accounting for price elasticity of demand) that crude demand growth is global GDP less 2%.
Oil basis matters more now than it has in recent years. For the past two years investors have made many of their E&P investment decisions on the portion of a companys production that is liquids vs. natural gas. Given large WTI crude discounts in 2011, however, the specific crude that a producer delivers has become more important. Going forward, we expect the WTI discount to LLS/Brent crudes to persist through mid 2012 when the Seaway pipeline is expected to reverse flow from Cushing to the Texas Gulf Coast. We see the WTI/Brent spread at $5/bbl by YE2012 vs. just over $10/bbl currently. For natural gas, we remain cautious and are using a 2012 Henry Hub gas assumption of $4.00/mcf. Based on the most recent IEA data, US natural gas production is up 7% for
the year despite lower gas prices. In 2011 YTD, gas has averaged $4.09/mcf, down 7% vs. $4.41 for the same period in 2010. Not surprisingly, inventories are also higher than we had expected and now sit at 3.85 tcf, essentially flat versus last year but 6% higher than the five-year average.
Headed into winter, we view weather as the primary wildcard for natural gas.
Weather, as measured in heating degree days, has been at five-year average levels since mid October. Longer term, we believe progress toward LNG export from Sabine Pass, Kitimat, and other potential terminals is bullish for natural gas. However, we do not expect new sources of demand to be meaningful before 2014.
M&A emerged as a significant theme in 2011, and we expect this will continue. Given economic uncertainty and disparate views on the direction of commodity prices, we believe cost-cutting and portfolio optimization have become more important vehicles for earnings growth. In recent months, energy M&A activity has been significant, highlighted by Kinder Morgans $21 bn pending purchase of El Paso announced October 16, Energy Transfer Equitys pending $9.4 bn acquisition of Southern Union Corp. first announced June 16, Statoils pending $4.4 bn acquisition of Brigham Exploration announced October 18, BHP Billitons $12.1 bn purchase of Petrohawk Energy announced July 14, and Enscos $7.3 bn acquisition of Pride International on February 7.
46
December 13, 2011
High Yield
Energy XXI (OP): Positive reserves trajectory

Exhibit 50: Benchmark security
GS TKR EXXI Rating OP Size (MM) $750 Coupon (%) 9.250 Priority Senior Maturity 15-Dec-17 Agency Ratings Caa1/B Next Call Price Date Last Price $107.00 YTW (%) 7.6% STW (bp) 664
104.625 15-Dec-14

We are Outperform rated on Energy XXI on attractive valuation, expected reserve and production growth, and oil leverage. In late 2010 the company acquired six ExxonMobil GOM properties (which increased reserves by 65%) to become the third largest oil producer on the Gulf shelf. While net debt/boe initially increased to $9.94 from $9.24 predeal, as of 3Q11 the company had reduced debt to $8.87/boe. We believe the bonds will outperform as (1) the company books reserves from its ultradeep prospects, possibly as early as at year-end 2011; (2) results from exploration activities and recompletions are reported; and (3) oily names like EXXI benefit from rising crude prices.

We expect EXXI to generate above-average reserve growth as the company books reserves from ultradeep prospects, possibly as early as late 2011. EXXI and partner McMoRan expect to complete a production test at Davy Jones #1 by year-end. Work also continues at Davy Jones #2, where the company expects production by mid 2012. However, EXXI is no longer just an ultradeep shelf story. Post the XOM acquisition in late 2010, we believe the company has an enviable backlog of projects, many of which are lower risk, lower capital recompletions. As these projects come online, we expect significant production growth in 2012. We see production rising 27% to 44k boe/d in FY2012 (ended June) from 35k boe/d in FY2011. We also expect EXXI to benefit from rising crude prices in 2012. The company is the third oiliest HY E&P in our coverage, after Whiting Petroleum and Denbury Resources. We expect about 70% of CY2012 volumes to be liquids. As a result of our expectations for higher oil prices and production growth, we see leverage falling to 1.3x by June 2012 vs. 2.0x currently.
What are the risks

We view acquisitions as the primary risk to the downside. The company has made numerous cash-financed acquisitions in the past. Another risk is our expectation for a significant production ramp-up in the second half of FY2012.
47
December 13, 2011
High Yield
Relative value
At a current yield of 7.6%, the Caa1/B EXXI 2017 bonds trade wide to similarly rated names such as Caa1/B- Oasis Petroleum 2021s (6.4%) and Caa1/B+ Rosetta Resources 2018s (7.3%). In addition, we point out that the EXXI bond is a $750 mn issue, making it one of the larger issues in B-rated HY energy.
Company description
EXXI is a Gulf of Mexico producer that has grown through debt-financed acquisitions and has significant exploration upside. The company's strategy is to acquire mature oilfields. In November 2009, Energy XXI announced it would acquire GOM shelf oil and gas properties from MitEnergy Upstream for $283 mn. In November 2010 the company announced a $1.2 bn shallow shelf asset purchase from XOM. Exhibit 51: Energy XXI Financial statistics
Revenue EBITDA (Adj for non-cash items) Free Operating Cash Flow Total Debt/EBITDA (LTM) EBITDA/Interest Expense (LTM) Debt to Capitalization % Total Debt and Preferred/Boe Cash and Equivalents Secured Credit Facility Long Term Debt 10% Senior Notes due 2013 16% Second Lien Jr. Sec Notes of 2014 9.25% Senior Notes due 2017 7.75% senior notes due 2019 Capital Leases/Other Total Long Term Debt Total Debt Preferred Equity Common Equity Total Capitalization
Summary Financials
Credit Ratios
Balance Sheet
FY2009A $434 $267 ($20) FY2009A 3.8x 3.2x 87% $16.25 At Issue
FY2010A $499 $284 ($24) FY2010A 3.2x 3.2x 64% $10.24 FY2010A $14 $109 $277 $386 $0 $0 $3 $665 $775 $100 437 $1,311
FY2011A $860 $497 $105 FY2011A 2.5x 4.7x 54% $9.55 FY2011A $28 $108 $0 $0 $750 $250 $6 $1,006 $1,113 $0 947 $2,060
FY2012E $1,289 $854 $334 FY2012E 1.3x 9.1x 41% $6.86 FY2012E $258 $0 $0 $0 $750 $250 $4 $1,004 $1,004 $0 1,453 $2,458
FY2013E $2,119 $1,506 $951 FY2013E 0.8x 17.0x 30% $6.86 Rating
FY2011 Production
US - Oil US - Oil 68% 68%
US - Gas US 32% Gas 32%
$750 $750 $750 $750
Caa1 / BB3 / BBCaa1 / B
6/30/11 Proved Reserves = 117MMBoe
US - Oil US - Oil 66% 66% US - Gas US - Gas 34% 34%
Type: Rate: Commitment: Outstanding:
Bank Debt Information
Secured credit facility from RBS and BNP maturing February 2014 LIBOR plus 150-225 bp, depending on utilization $750 Availability: $489 $29 Letters of Credit: $232 FY2009A 11,367 47,886 19,348 FY2009A 31 133 53 42% 64% 7.5 4.8 FY2009A $266 $0 $33.02 $36.10 FY2010A 14,679 42,578 21,775 FY2010A 47 169 76 37% 70% 9.5 6.6 FY2010A $145 $293 $14.35 $24.63 FY2011A 23,441 67,213 34,643 FY2011A 77 236 117 34% 70% 9.2 6.5 FY2011A $281 $974 $21.03 $20.06 FY2012E 30,305 81,209 43,840 FY2012E 93 319 146 36% 65% 9.1 5.9 FY2012E $450 ($0) $9.82 $15.83 FY2013E 44,438 105,675 62,050 FY2013E 84 392 150 44% 65% 6.6 4.3 FY2013E $450 $0 $17.43 $16.48
Crude Oil (bbl/d) Natural Gas (mmcf/d) Total (boe/d)
Production
Debt Maturity Schedule $800 $700

Debt Maturities ($ mm)
$750
$750
Oil - Proved (MMBbl) Gas - Proved (Bcf) Total - Proved (MMBoe) % Gas % Proved Developed Proved R/P Ratio PDP R/P Ratio
Reserves
$600 $500 $400 $300 $200 $100 $0 $0

2012 2010
$250
$250
Capital Expenditures ($mm) Net Acquisitions ($ mm) Finding Costs ($/boe) Finding Costs - 3-Yr ($/boe)
Capital Spending
$0
2013 2011
$29 $29 $0 $0 $0 $0
2014 2012 2015 2013 2016 2014 2017 2015
$0
2018 2016 2019 2017
$0
2020 2018
0
2021 2019
$0 0
2022 2020
48
December 13, 2011
High Yield
Tesoro Corp. (U): Underperform on recent outperformance and crack spread weakness
Exhibit 52: Benchmark security and CDS
GS TKR TSO Rating U Size (MM) $300 Coupon (%) 9.750 Priority Senior Maturity 01-Jun-19 Agency Ratings Ba1/BB+ Next Call Price 104.875 Date 01-Jun-14 Last Price $112.00 YTW (%) 6.282 STW (bp) 590 5-yr CDS 308

We recently downgraded TSO to U from IL following recent outperformance. Since October 1, the TSO 2019 bonds are +$2.5 to a current price/z-spread/yield of $112/559 bp/6.3%, outperforming overall HY energy by 69 bp. Over the same time period the ANS532 crack spread has fallen almost 60%. We generally believe 2012 will be a more difficult year for the US refiners given (1) expected global capacity additions, (2) persistently high US unemployment, and (3) declining US crude differentials vs. global benchmarks.

Tesoro hosted a New York analyst day on December 5 at which they outlined a number of internal capital projects management believes can boost crude slate flexibility and margin capture. While we believe many of these projects will deliver attractive returns for equity holders, the downside for bondholders is likely to be higher capital spending. For 2012 the company is guiding to $670 mn spending (including $300 mn turnaround spend) vs. $320 mn in 2011 (with only $110 mn turnaround spend). While we still see TSO as FOCF positive in 2012, we note that our FOCF estimate of $387 mn for 2012 is well below 2011s $1.1 bn. For TSO we see 2012 EBITDA at $1.5 bn and leverage of 1.1x at YE2012 vs. 0.9x currently. In addition, refiners generally remain at the bottom of our pecking order for the energy subsectors. Unemployment in California is still 11.9%, and we believe labor improvement is needed for sustained margin recovery. Our economics team is forecasting 8.9% US unemployment for 2012. At current levels, we believe valuation on the TSO 2019s (6.2% yield) is unattractive on a YTW basis vs. Ba1/BB+ peers such as refiner SUN (4.3x levered; 424 bp/5.5% on the 2017 bonds), E&P QEP Resources (1.2x; 383 bp/5.8% on the 2021s), and driller Precision Drilling (1.6x; 450 bp/6.3% on the 2021s). Although TSO trades wide to these peers, the differential has compressed. Over the past year TSO has traded an average of 213 bp wide to QEP and 207 bp wide to PDC vs. current differentials of 176 bp and 109 bp, respectively. At this point in the cycle, we prefer E&Ps and servicers to refiners as we expect 2012 to be difficult for US refining. TSO CDS is currently trading at 308 bp, approximately 22 bp tight to Sunoco and 87 bp tight to Chesapeake. We see room for TSO CDS to widen given recent outperformance and the weak outlook for the business. Since October 1, TSO CDS has tightened 194 bp, while overall HY energy has tightened 180 bp. On average in 2011, TSO has traded 0 bp wide to CHK and 157 bp wide to VLO, whereas it is currently trading 87 bp tight and 89 bp wide, respectively. We see 50-100 bp of widening potential.
49
December 13, 2011
High Yield
What are the risks

We view faster than expected improvement in unemployment and unexpected strength in crack spreads as the primary risks to the upside.
Company description
TSO owns and operates seven US refineries with 665k b/d of total throughput capacity. The company also has a retail segment with approximately 1,200 retail stations, of which 375 are company owned. In April 2011, the company priced the IPO of Tesoro Logistics Partners (TLLP). TLLP owns Tesoros transportation and storage assets in the Williston Basin and Midwest. Tesoro continues to own 52% of TLLP. Exhibit 53: Tesoro Corp. Financial statistics
Revenue EBITDA (Adj for non-cash items) Free Operating Cash Flow EPS
Summary Financials
2008A $28,309 $1,026 $213 $2.48 2008A 1.6x 8.6x 33% At Issue
2009A $16,872 $442 ($19) ($0.87) 2009A 4.2x 3.4x 37% 2009A $413 $0 $125 $450 $450 $500 $289 $27 $1,841 $1,841 $0 3,087 $4,928
2010A $20,583 $561 $97 ($0.46) 2010A 3.6x 3.6x 38% 2010A $648 $150 $136 $450 $450 $500 $290 $21 $1,847 $1,997 $0 3,215 $5,212
2011E $31,254 $1,912 $1,122 $5.48 2011E 0.8x 10.9x 29% 2011E $1,263 $70 $0 $299 $450 $473 $290 $22 $1,534 $1,604 $0 3,329 $4,933
2012E $31,721 $1,478 $387 $4.10 2012E 1.1x 10.8x 26% Rating
2011E Refining Product Sales = 642,000 bbl/d
Total Debt/EBITDA (LTM) EBITDA/Interest Expense (LTM) Debt to Capitalization % Cash and Equivalents Revolving Credit Facility Long Term Debt 7.5% Jr Sub Notes due 2012 6.25% Sr. Notes due 2012 6.625% Sr. Notes due 2015 6.5% Sr. notes due 2017 9.75% Sr. notes due 2019 Other, primarily capital leases Total Long Term Debt Total Debt Preferred Equity Common Equity Total Capitalization
Credit Ratios
Diesel Fuel 22%
Heavy Oils, Resid and Other 19%
Balance Sheet
$450 $450 $450 $500 $300 $0
Ba1 / BB+ Ba1 / BB+ Ba1 / BB+ Ba1 / BB+
Jet Fuel 13%
Gasoline and Blends 46%
Debt Maturity Schedule $500 $1,514 $916 $450 $400

Debt Maturities ($ mm)
Type: Rate: Commitment: Outstanding:
Bank Debt Information
Credit facility expiring March 16, 2016 3.25% Availability: $2,500 $70 Letters of Credit: 2008A 596,000 89% 644,000 $15.35 $6.54 472 25% 2008A $212 $0 2009A 556,000 83% 591,250 $12.99 $8.94 1,412 25% 2009A $437 $0 2010A 404,500 60% 572,250 $13.47 $10.60 1,660 27% 2010A $297 $0 2011E 578,300 86% 610,187 $14.72 $15.47 1,718 29% 2011E $321 $0
$450
$473
Crude Oil Refined (b/d) Utilization (%) Total Product Sales California Crack $/Bls Gross Margin $/Bls Retail Fuel Volume (MM of gallons) Retail Merchandise Margin
Operating Statistics
$350 $300 $250 $200 $150 $100 $50 $0
2012E 553,638 83% 575,525 $12.96 $12.71 1,457 27% 2012E $670 $0
$299
$290
Capital Expenditures ($mm) Net Acquisitions ($ mm)
Capital Spending
$0
2012 2013
$0
2014 2015
$0
2016 2017
$0
2018 2019
$0
2020
$0
2021
$0
2022
50
December 13, 2011
High Yield
Food & Beverage/Restaurants: Coverage view and recommendations

Karen Eltrich Goldman, Sachs & Co. karen.eltrich@gs.com 1-212-902-6957 Jordan Hughes Goldman, Sachs & Co. jordan.hughes@gs.com 1-212-357-7875 We maintain our Cautious coverage view on the Food & Beverage sector and our Neutral view on the Restaurant sector. In the Food & Beverage sector, corn, wheat, and soybeans all experienced large yoy increases for most of 2011. PPC suffered the most as chicken pricing was weak, while SFD benefited from strong hog pricing. In 2012 we expect that high feed costs will remain a challenge for producers as commodity cost inflation continues. We think that hog pricing will continue to be strong on strong global demand, and we believe chicken pricing will begin to see strength as lower supply begins to hit the market. Del Monte Foods, Dole Foods, and Chiquita had to work through higher commodity costs as well. The processors felt pressures from elevated fuel, transportation, and food costs, while at the same time pricing was weak for several processors key segments. In 2012 we expect these pressures to continue while intense competition and a fickle consumer limit processors ability to pass through cost increases. Beverage companies havent been immune to the cost increases: CEDC, Cott, and Dean Foods all noted higher input costs this year. In 2012 we think milk prices will remain elevated for Dean Foods while CEDC will need to address the issues it faces in Russia. In the Restaurant sector, we think that consumers continue to look for value-focused products in both casual dining concepts and quick service restaurants. We believe that those restaurants that are able to keep costs in check and offer value to their customers will be most successful in delivering growth. In this environment, we prefer DineEquity to Burger King and Fiesta Restaurants because DIN has less exposure to the price sensitivities of consumers and input cost inflation given its franchisor model. Exhibit 54: Relative Valuation
Food & Beverage and Restaurants
Security Burger King (BKC) BKC 9.875% Sr. Notes BKC 0% Sr. Holdco Notes Carrols Restaurant Group (TAST) TAST 8.875% Sr. Sec Fiesta Notes CEDC 9.125% Sr. Sec Notes CEDC 3% Sr. Converts Chiquita Brands International (CQB) CQB 7.5% Sr. Notes CQB 4.25% Sr. Converts Constellation Brands (STZ) STZ 8.375% Sr. Notes STZ 7.25% Sr. Notes STZ 7.25% Sr. Notes Cott Corp (BCB) BCB 8.375% Sr. Notes BCB 8.125% Sr. Notes Dean Foods (DF) DF 7% Sr. Notes DF 6.9% Sr. Notes DF 9.75% Sr. Notes Del Monte Foods (DLM) DLM 7.625% Sr. Notes DineEquity (DIN) DIN 9.5% Sr. Notes Dole Foods (DOLE) DOLE 13.875% Sr. Sec Notes DOLE 8% Sr. Sec Notes DOLE 8.75% Sr. Notes Pilgrim's Pride (PPC) PPC 7.875% Sr. Notes Smithfield Foods (SFD) SFD 10% Sr. Sec. Notes SFD 7.75% Sr. Notes SFD 7.75% Sr. Notes SFD 4% Sr. Converts 7/15/2014 5/15/2013 7/1/2017 6/30/2013 N/A N/A N/A N/A N/A N/A N/A N/A $636.0 mn $160.0 mn $500.0 mn $400.0 mn Ba2/BB+ B2/BBB2/BBNR/BB$115.50 $106.75 $109.00 $122.50 3.66 2.85 5.83 -9.24 297 221 451 (1,010) 12/15/2018 IL 12/15/2014 $103.94 $500.0 mn Caa1/B$92.00 9.46 787 $13,088 $1,072 8.2% 5.8x 27.8% 0.8x 1.9x 1.9x 5 Yr CDS Bid/Ask: 340/370 4.7% 3/15/2014 10/1/2016 7/15/2013 IL 3/15/2012 10/1/2012 N/A $113.88 $104.00 N/A $174.9 mn $315.0 mn $155.0 mn B2/B+ B2/B+ B3/B$115.00 $103.63 $105.00 4.82 6.55 5.41 418 584 477 $7,518 10/30/2018 OP 10/30/2014 $104.75 $785.3 mn B3/CCC+ $106.00 7.99 683 $7,251 $388 5.3% 2.7x 20.8% 3.6x 3.6x 4.2x -456.6% -22.9x -36.0x 4.2x 4.2x 5 Yr CDS Bid/Ask: 630/660 -36.0x -10.1% 9.5% 2/15/2019 OP 2/15/2014 $103.81 $1,300.0 mn B3/CCC+ $91.00 9.37 774 $1,070 $314 29.3% 2.3x 8.4% 3.3x 5.7x 5.7x 5.0% 6/1/2016 10/15/2017 12/15/2018 U N/A N/A N/A N/A 12/15/2014 $104.88 $500.0 mn $142.0 mn $400.0 mn B2/BB2/BB2/B$98.25 $97.00 $105.00 7.47 7.54 8.50 639 615 732 $3,792 $584 15.4% 2.4x 13.2% 4.2x 6.4x 11/15/2017 9/1/2018 OP 11/15/2013 $104.19 9/1/2014 $104.06 $215.0 mn $375.0 mn B3/B B3/B $107.00 $107.00 6.33 6.38 539 525 $13,128 $728 5.5% 2.9x 44.7% 3.8x 5.2x 5.2x 5 Yr CDS Bid/Ask: 699/743 6.6x 4.0% 2.2% 12/15/2014 9/1/2016 5/15/2017 U N/A N/A N/A N/A N/A N/A $500.0 mn $700.0 mn $700.0 mn Ba2/BB+ Ba2/BB+ Ba2/BB+ $111.00 $110.25 $109.50 4.42 4.79 5.21 367 366 392 $2,330 $217 9.3% 3.9x 20.2% 0.0x 2.9x 11/1/2014 8/15/2016 IL Current N/A $101.25 N/A $106.4 mn $200.0 mn Caa1/BNR/B$101.00 $85.50 6.30 8.03 567 689 $2,719 $891 32.8% 5.1x 9.2% 0.3x 2.8x 2.8x 5 Yr CDS Bid/Ask: 240/270 2.9x 15.9% 26.9% 8/15/2016 12/1/2016 3/15/2013 IL IL 2/15/2014 12/1/2013 N/A $104.44 $104.56 N/A $200.0 mn $380.0 mn $310.0 mn B2/B B2/BNR/CCC $100.00 $70.00 $83.50 8.87 18.65 18.35 787 $950 1,749 1,736 $3,190 $142 4.4% 2.8x 53.1% 2.3x 4.1x 3.1x 17.0% $156 16.4% 1.4x 5.1% 6.3x 8.2x 8.2x -0.2% Central European Distribution Corporation (CEDC) 10/15/2018 4/15/2019 U 10/15/2014 $104.94 4/15/2015 $94.79 $796.2 mn $685.0 mn B3/BCaa1/CCC+ $108.75 $60.50 7.67 11.58 653 984 $821 Maturity GS Rating Next Call Date Price Amount Oustanding Bid Price For the projeted year end (unless otherwise noted) EBITDA EBITDA/ Capex/ Senior Debt/ Debt/ Margin Interest EBITDA EBITDA EBITDA 23.8% 2.9x 11.5% 2.8x 5.0x 5.7x 59.7% 3.3x 3.3x 5.1x 2.1% 5.7x Debt+Rent*8/ EBITDAR 5.7x FCF/ Debt 9.8%
Rating
YTW
Z-Spr
Sales $2,338
EBITDA $557
Sr. Notes Debt/EBITDA: Sr. Holdco Notes Debt/EBITDA: $82 10.0% 4.0x
Sr. Sec. Notes Debt/EBITDA: Sr. Unsec. Notes Debt/EBITDA: ($42) -0.6% -0.4x
IL
Source: Goldman Sachs Credit Research estimates.
51
December 13, 2011
High Yield
Dean Foods: Discount meritedreiterate underperform

Exhibit 55: Benchmark security and CDS
TKR DF GS Rating U Size (MM) $500 Coupon (%) 7.000% Priority Sr. Notes Maturity 6/1/2016 Agency Ratings B2/BNext Call Price Date N/A N/A Bid Price 98.25 YTW (%) 7.47 STW (bp) 639 5 yr CDS bid / ask 7 pts / 8.5 pts

While earnings appear to have stabilized, we dont anticipate a recovery to historical levels given that current challenges are likely to linger. These include elevated input costs, a competitive retail environment, and the sluggish economy. Given management has been proactive in managing costs, we do expect 2012 EBITDA to improve to $797 mn, providing coverage and leverage of 3.1x and 4.5x, respectively. This is well within the 2012 covenant test of 5.5x. We are more concerned with amortizations. Under our forecast we see free cash flow at $171 mn versus $187 mn and $231 mn in scheduled payments for 2012 and 2013, respectively. Barring additional asset sales, we see high potential that Dean terms out its bank debt, at a likely higher cost, further reducing free cash flow.

Dean reported 3Q11 EBITDA of $176 mn versus $173 mn in 3Q10 and in line with our forecast for $177 mn. Fresh Dairy Direct-Morningstar operating income continues to be challenged by the poor economy and elevated dairy pricing, declining 18% yoy to $95 mn. Volumes were flat, however, above our expectations as new customer wins offset negative industry trends. WhiteWave-Alpro continues to show strong growth trends with operating income increasing 39% yoy to $52 mn. Although dairy has shown sequential pricing declines in 4Q11, management did take a cautious tone in their outlook for 2012. Citing the weak dollar and emerging market demand, they expect dairy to remain above historical norms in 2012 and believe that volumes will remain challenged until unemployment levels improve.

The key upside risk is a deleveraging asset sale.
Company description
Dean Foods is the largest processor and distributor of milk and various other dairy products in the United States. It has two divisions: (1) Fresh Dairy Direct-Morningstar, the largest US processor and distributor of milk, creamer, and cultured dairy products, selling its products under a variety of local and regional brand names and private labels; and (2) WhiteWave-Alpro, which develops, manufactures, markets, and sells a variety of nationally branded soy, dairy, and dairy-related products, such as Silk Soymilk, Horizon Organic dairy products, International Delight coffee creamers, and Land O Lakes creamers and fluid dairy products.
December 13, 2011
High Yield
Exhibit 56: Dean Foods Financial model

($, millions)
4Q 12/30/10 Year 1Q 2Q 3Q 4QE 12/30/10 03/31/11 06/30/11 09/30/11 12/31/11 YearE 1QE 2QE 3QE 4QE 12/31/11 04/01/12 07/02/12 10/02/12 01/02/13 YearE 01/02/13
Earnings Summary Revenues Cost of Goods Sold Gross Profit Gross Margin SG&A % of Sales Amortization of Intangibles Plant Closures Operating Income Operating Margin Depreciation & Amortization Nonrecurring & Extraordinary Expenses EBITDA EBITDA Margin Key Figures Interest Expense Interest Income Other Income (Expense) Income Taxes Tax Rate Net Income Minority Interest Net Income before Accounting Change Cumulative Accounting Change Net Income Diluted Shares EPS Capital Expenditures Capex/Total Sales Cash Senior Debt Total Debt Total Debt + Converts Net Debt Available Credit Accounts Receivable Accounts Payable Inventories Selected Credit Ratios EBITDA/Interest EBITDA-Capex/Interest Senior Debt/EBITDA Debt/EBITDA Net Debt/EBITDA
$3,153.0 $12,134.1 $3,049.9 $3,298.8 $3,410.8 $3,368.2 $13,127.7 $2,962.1 $3,309.3 $3,454.1 $3,413.8 $13,139.3 2,395.9 9,125.2 2,299.6 2,539.2 2,669.5 2,566.6 10,075.0 2,227.5 2,541.6 2,676.9 2,597.9 10,043.8 757.1 3,008.9 750.3 759.6 741.3 801.6 3,052.8 734.6 767.8 777.2 815.9 3,095.4 24.0% 24.8% 24.6% 23.0% 21.7% 23.8% 23.3% 24.8% 23.2% 22.5% 23.9% 23.6% 647.3 2,537.8 650.5 645.7 646.9 673.6 2,616.7 622.0 642.0 656.3 665.7 2,586.0 20.5% 20.9% 21.3% 19.6% 19.0% 20.0% 19.9% 21.0% 19.4% 19.0% 19.5% 19.7% 2.8 11.3 2.7 2.6 2.6 0.0 8.0 0.0 0.0 0.0 0.0 0.0 44.4 60.8 (8.8) 127.6 1,964.1 0.0 2,082.9 0.0 0.0 0.0 0.0 0.0 62.5 399.0 105.9 (16.4) (1,872.3) 128.0 (1,654.8) 112.6 125.8 120.9 150.2 509.4 2.0% 3.3% 3.5% -0.5% -54.9% 3.8% -12.6% 3.8% 3.8% 3.5% 4.4% 3.9% 73.0 49.2 184.7 5.9% 276.1 73.1 748.3 6.2% 72.3 (8.8) 169.4 5.6% 71.0 128.1 182.7 5.5% 70.6 1,977.6 175.9 5.2% 72.0 0.0 200.0 5.9% 285.9 2,096.9 728.0 5.5% 72.0 0.0 184.6 6.2% 72.0 0.0 197.8 6.0% 72.0 0.0 192.9 5.6% 72.0 0.0 222.2 6.5% 288.0 0.0 797.4 6.1%
70.6 0.0 (0.3) 14.4 -172.9% (22.7) 0.0 (22.7) 1.1 25.5 182.2 ($0.12) 121.4 3.9% 92.0 3,033.0 4,067.5 4,067.5 3,975.5 1,220.4 891.0 1,262.9 425.6
248.3 0.5 (0.3) 73.5 48.7% 77.5 0.0 77.5 0.0 150.6 182.2 $0.43 302.0 2.5% 92.0 3,033.0 4,067.5 4,067.5 3,975.5 1,220.4 891.0 1,262.9 425.6
65.3 0.0 0.0 17.3 42.6% 23.4 (1.9) 25.3 0.0 16.4 182.2 $0.13 40.4 1.3% 108.6 2,959.6 3,988.9 3,988.9 3,880.3 2,383.4 935.9 1,273.4 466.3
63.5 62.9 0.0 0.4 0.7 0.0 (26.2) (379.1) 33.1% 19.6% (53.0) (1,555.7) (2.5) (15.2) (50.5) (1,540.5) 0.0 0.0 77.6 437.1 183.4 183.7 ($0.29) ($8.47) 78.3 2.4% 115.8 2,800.3 3,828.9 3,828.9 3,713.1 1,449.9 925.8 1,253.3 488.8 96.7 2.8% 107.7 2,822.3 3,850.8 3,850.8 3,743.1 1,472.9 1,000.4 1,262.4 481.2
63.3 0.0 0.0 27.5 42.6% 37.1 0.0 37.1 0.0 37.1 183.7 $0.20 110.0 3.3% 150.3 2,762.5 3,791.0 3,791.0 3,640.7 1,425.0 954.1 1,352.3 455.7
255.0 0.4 0.8 (360.5) 18.9% (1,548.2) 0.0 (1,548.2) 0.0 548.7 183.7 ($8.43) 325.4 2.5% 150.3 2,762.5 3,791.0 3,791.0 3,640.7 1,425.0 954.1 1,352.3 455.7
66.3 0.0 0.0 14.8 32.0% 31.4 0.0 31.4 0.0 31.4 183.7 $0.17 40.0 1.4% 110.6 2,720.1 3,748.6 3,748.6 3,638.1 1,425.0 936.7 1,274.4 466.7
65.3 0.0 0.0 19.3 32.0% 41.1 0.0 41.1 0.0 41.1 183.7 $0.22 70.0 2.1% 62.7 2,677.8 3,706.3 3,706.3 3,643.6 1,425.0 928.3 1,256.8 490.2
64.4 0.0 0.0 18.1 32.0% 38.4 0.0 38.4 0.0 38.4 183.7 $0.21 70.0 2.0% 3.7 2,635.4 3,663.9 3,663.9 3,660.2 1,425.0 1,011.6 1,276.5 486.5
63.3 0.0 0.0 27.8 32.0% 59.1 0.0 59.1 0.0 59.1 183.7 $0.32 80.0 2.3% 131.4 2,593.1 3,621.6 3,621.6 3,490.2 1,425.0 967.0 1,370.6 461.9
259.3 0.0 0.0 80.0 32.0% 170.0 0.0 170.0 0.0 170.0 183.7 $0.93 260.0 2.0% 131.4 2,593.1 3,621.6 3,621.6 3,490.2 1,425.0 967.0 1,370.6 461.9
2.62 0.90
3.0x 1.8x 4.1x 5.4x 5.3x
2.8x 1.7x 4.1x 5.5x 5.3x
2.7x 1.5x 3.9x 5.4x 5.2x
2.7x 1.4x 4.0x 5.4x 5.3x
2.9x 1.6x 3.8x 5.2x 5.0x
2.9x 1.6x 3.8x 5.2x 5.0x
2.9x 1.6x 3.7x 5.0x 4.9x
2.9x 1.7x 3.5x 4.9x 4.8x
3.0x 1.9x 3.4x 4.7x 4.7x
3.1x 2.1x 3.3x 4.5x 4.4x
3.1x 2.1x 3.3x 4.5x 4.4x
53
December 13, 2011
High Yield
Gaming, Lodging & Leisure: Coverage view and recommendations

Kevin Coyne Goldman, Sachs & Co. kevin.coyne@gs.com 1-212-357-9918 Celeste Everett Goldman, Sachs & Co. celeste.everett@gs.com 1-212-902-4751 We have a Neutral coverage view for the gaming, lodging, and leisure sectors. For the gaming sector, we expect moderate growth in gaming revenues as gaming operators have become focused on the more profitable customers in a relatively sluggish macroeconomic environment. Despite the relatively high unemployment rate and reduced discretionary income, customer spend per visit moderated in 2011 and even began to grow for some operators. We believe the outlook for sluggish but modest GDP growth during 2012 indicates low- to mid-single-digit gaming revenue growth across the US. We estimate that new casinos openings in Ohio, New Jersey, Kansas, and Maryland will increase the numbers of gaming positions by 31,000, or more than double the 2011 additions.
Las Vegas Strip: On the Las Vegas Strip, operators have benefited from a return of group
and convention business over the last 12 months, which we expect will continue to ramp in 2012. We have seen an improvement in average daily rate (ADR) from both the convention and leisure segments as occupancies are boosted by group business. We expect virtually no new supply to the market, creating further support for higher room rates.
Las Vegas Locals: As results have improved for the Las Vegas Strip operators, we believe
the Las Vegas Locals will begin to reflect the improved local economy by the end of 2012, which should translate into flat to low-single-digit top-line growth. One of the pressures weighing on the Las Vegas Locals market has been high unemployment (13.1% as of October versus the national average of 9.0% in October). We acknowledge that the unemployment rate will likely remain elevated because many of the jobs lost through the recent downturn (e.g., construction jobs) will not fully return, but we do not think a high unemployment rate will eliminate a recovery.
Atlantic City: Following the anniversary of the addition of Pennsylvania table games in July 2010 and the opening of SugarHouse in downtown Philadelphia, Atlantic City has seen gaming revenue declines moderate, although they remain negative. With the opening of the $2.5 billion Revel Casino scheduled for May 2012, we are forecasting for revenue declines of 5% at the Borgata with EBITDA declines of around 10%. Midwest/Gulf Coast: In the Midwest, we expect existing operators to be pressured by added supply in 2012, including the opening of three Ohio casinos (HET and PENN), two Kansas casinos (PENN and PENGAM), ISLEs new casino in Cape Girardeau, MO, and the ramp of Rivers Casinos in Des Plaines, IL (MWGAME). Along the Gulf Coast, we expect operators to benefit from a strong regional economy, driven by a healthy energy sector. We continue to monitor the position of other state governments on either outright legalization or expansion of gaming (Massachusetts, Illinois, Florida, New York, California, and Texas). Internet gaming: We will also continue to monitor the potential for the removal of the
federal ban on Internet gaming, particularly for Internet poker. However, we think the probability of legalization declines in 2012 due to the presidential election year. In the lodging sector, we believe hotel operators will continue to benefit from the restricted amount of new supply, with US rooms under construction down 74% from peak levels in December 2007. With a return of corporate and group travelers, RevPAR is expected to increase 8% in 2011 and a further 4% in 2012, according to Smith Travel Research. We expect RevPAR will increase in the mid single digits in 2012. On the leisure side, we expect the pricing environment in the cruising sector to remain relatively stable given moderate levels of added supply, although we remain concerned about the sluggish macroeconomic environment pressuring discretionary spending and the impact on the European consumer from increasing austerity programs in Europe.
December 13, 2011
High Yield
Caesars Ent. Operating Co.: Buy the 11.25s of 2017

Exhibit 57: Caesars Entertainment OpCo benchmark bonds and 5-year CDS
GS Rating OP IL IL Size (MM) $2,095 $4,553 $479 Coupon (%) 11.250 10.000 10.750 Priority Sr Sec (1st) Nts Sr Sec (2nd) Nts Sr Nts Maturity 01-Jun-17 15-Dec-18 01-Feb-16 Agency Ratings B3/B - / CCC Ca/CCC Next Call Date Price 01-Jun-13 105.620 15-Dec-13 01-Feb-12 105.000 105.375 Bid Price 104.500 62.750 65.000 YTW (%) 9.69 20.16 64.73 STW (bp) 934 1,872 2,411 Z-Spread (bp) 884 1,864 2,376 5-yr CDS (bp) 53 +500 53 +500 53 +500

We think the Caesars Entertainment OpCo (HET) 11.25% first lien notes of 2017 offer the best risk-adjusted return in the gaming sector. At 104.5 (YTW = 9.7%, STW = 934 bp), the 7.1x-levered first lien bonds offer attractive yield compared to the MGM 11.125% senior secured notes due 2017 at 113 (YTW = 5.3%, STW = 511 bp) and Wynn Las Vegas 7.75% senior secured notes due 2020 at 109.25 (YTW = 5.9%, STW = 552 bp). The bonds offer an attractive double-digit current yield, solid asset coverage, and covenant protection that limits additional first lien debt. We think that HET has ample liquidity ($1.1 billion of revolver availability and $778 million of cash on hand as of 3Q2011) to move through 2012, and we expect free cash flow to break even by 2013 once capex steps down following the completion of its LINQ project in Las Vegas. With the next major debt maturity being its undrawn revolver due January 2014, HET still has runway to grow adjusted EBITDA. Furthermore, a potential positive catalyst over the next few years would be a lift in the federal ban on Internet poker.

Risks to our view include weaker discretionary spending and a smaller recovery in rated play and spend per visit.

HET posted weaker than expected 3Q2011 results, largely due to lower than normal table hold. The company continues to make progress on its Rock Ohio Caesars developments, with scheduled opening dates of March 2012 for the Cleveland facility and 2Q2013 for the Cincinnati facility. In Las Vegas, the 662-room Octavius Tower is set to open in early January 2012, and HET continues to make progress on its LINQ entertainment corridor project, scheduled to open in 2Q2013. Furthermore, HET continues to look for low capital expansion opportunities both domestically and abroad through the execution of management and licensing agreements. In 2012 we expect net revenues to increase 2.0% yoy to $6.98 billion as we anticipate healthy revenue growth in Las Vegas and modest growth in Louisiana/Mississippi to offset weakness in Atlantic City and Illinois/Indiana. The Atlantic City market will face the opening of the $2.5 billion Revel Casino in May 2012, and Illinois/Indiana will continue to be impacted by the opening of Rivers Casino in the Chicagoland market. On a consolidated basis, we expect promotional expenses to be roughly flat from 2011 at 12% of gross revenues. We anticipate property, general & administrative and corporate expenses will moderate to 23.5% of net revenue, resulting in adjusted EBITDA growth of 9% yoy to $1.66 billion. Due to the elevated amount of project capex, we expect a free cash flow burn of
December 13, 2011
High Yield
approximately $526 million. We anticipate gross leverage declining to 11.4x by year-end (versus 12.8x as of 3Q2011), or 11.0x net of cash (versus 12.2x as of 3Q2011).
Company description
Caesars Entertainment (HET, formerly known as Harrahs Entertainment) operates 52 casinos primarily in the US and UK, most of which are under the Harrahs, Caesars, and Horseshoe brand names. The company operates land-based casinos, riverboat and dockside casinos, casinos on Indian reservations, and racinos. HET properties have over 40,000 hotel rooms and 3 million square feet of casino floor space. HET also operates the World Series of Poker tournament circuit. In January 2008, HET was acquired by TPG Capital and Apollo Management. The transaction was financed with $14 billion of new bank and bond debt, $6.5 billion of CMBS financing, and $6 billion of new equity. Caesars Entertainment OpCo owns, operates, or manages 46 of the properties, while six of the properties support the CMBS financing (Harrahs Las Vegas, Rio, Flamingo Las Vegas, Paris Las Vegas, Harrahs Atlantic City, and Harrahs Laughlin). Exhibit 58: Caesars Entertainment Operating Company segment summary
($, millions)
$mm 2008 2009 2010 1Q11 2Q11 3Q11 4Q11E 2011E 1Q12E 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
Net Revenue Las Vegas Region Atlantic City Region Louisiana / Mississippi Region Iowa / Missouri Region Illinois / Indiana Region Other Nevada Region Managed / International / Other Total net revenue As % of total net revenue Las Vegas Region Atlantic City Region Louisiana / Mississippi Region Iowa / Missouri Region Illinois / Indiana Region Other Nevada Region Managed / International / Other Total net revenue y-o-y % change in revenue Las Vegas Region Atlantic City Region Louisiana / Mississippi Region Iowa / Missouri Region Illinois / Indiana Region Other Nevada Region Managed / International / Other Total net revenue Property EBITDA Las Vegas Region Atlantic City Region Louisiana / Mississippi Region Iowa / Missouri Region Illinois / Indiana Region Other Nevada Region Managed / International / Other Total property EBITDA Property EBITDA margin Las Vegas Region Atlantic City Region Louisiana / Mississippi Region Iowa / Missouri Region Illinois / Indiana Region Other Nevada Region Managed / International / Other Total property EBITDA
1,437 1,777 1,447 783 1,184 406 661 7,695
1,215 1,528 1,245 757 1,172 333 623 6,873
1,441 1,418 1,193 735 1,160 308 602 6,857
392 335 286 177 277 69 171 1,708
417 357 268 185 269 72 150 1,718
378 369 292 184 260 103 148 1,733
416 315 290 180 257 63 161 1,684
1,604 1,376 1,136 727 1,063 308 630 6,843
424 342 292 183 263 70 171 1,744
450 364 273 191 255 73 155 1,761
408 350 298 190 254 104 150 1,753
450 300 296 186 265 64 160 1,720
1,732 1,355 1,158 749 1,037 311 636 6,978
1,810 1,340 1,193 771 1,068 314 640 7,136
1,882 1,380 1,229 794 1,100 317 645 7,348
18.7% 23.1% 18.8% 10.2% 15.4% 5.3% 8.6% 100.0%
17.7% 22.2% 18.1% 11.0% 17.1% 4.8% 9.1% 100.0%
21.0% 20.7% 17.4% 10.7% 16.9% 4.5% 8.8% 100.0%
23.0% 19.6% 16.7% 10.4% 16.2% 4.1% 10.0% 100.0%
24.3% 20.8% 15.6% 10.8% 15.6% 4.2% 8.7% 100.0%
21.8% 21.3% 16.8% 10.6% 15.0% 5.9% 8.5% 100.0%
24.7% 18.7% 17.2% 10.7% 15.3% 3.8% 9.5% 100.0%
23.4% 20.1% 16.6% 10.6% 15.5% 4.5% 9.2% 100.0%
24.3% 19.6% 16.7% 10.5% 15.1% 4.0% 9.8% 100.0%
25.6% 20.7% 15.5% 10.8% 14.5% 4.1% 8.8% 100.0%
23.3% 20.0% 17.0% 10.8% 14.5% 5.9% 8.6% 100.0%
26.1% 17.4% 17.2% 10.8% 15.4% 3.7% 9.3% 100.0%
24.8% 19.4% 16.6% 10.7% 14.9% 4.5% 9.1% 100.0%
25.4% 18.8% 16.7% 10.8% 15.0% 4.4% 9.0% 100.0%
25.6% 18.8% 16.7% 10.8% 15.0% 4.3% 8.8% 100.0%
-11.7% -5.1% -6.0% -3.5% -7.9% -10.5% 19.2% -5.5%
-15.5% -14.0% -13.9% -3.3% -1.0% -18.1% -5.7% -10.7%
18.6% -7.2% -4.2% -2.8% -1.0% -7.5% -3.5% -0.2%
15.4% -2.1% -6.8% -5.4% -6.7% -4.8% 3.6% -0.2%
19.8% -2.0% -10.4% -0.5% -9.0% -5.2% 11.2% 0.8%
3.3% -7.6% -3.8% -1.3% -10.2% 6.2% 1.6% -3.0%
7.5% 1.0% 2.0% 3.0% -7.5% 2.5% 3.0% 1.7%
11.3% -2.9% -4.8% -1.1% -8.3% 0.0% 4.7% -0.2%
8.0% 2.0% 2.0% 3.0% -5.0% 1.0% -0.1% 2.1%
8.0% 2.0% 2.0% 3.0% -5.0% 1.0% 3.0% 2.5%
8.0% -5.0% 2.0% 3.0% -2.5% 1.0% 1.6% 1.2%
8.0% -5.0% 2.0% 3.0% 3.0% 1.0% -0.5% 2.2%
8.0% -1.5% 2.0% 3.0% -2.5% 1.0% 0.9% 2.0%
4.5% -1.2% 3.0% 3.0% 3.0% 1.0% 0.7% 2.3%
4.0% 3.0% 3.0% 3.0% 3.0% 1.0% 0.7% 3.0%
403 371 295 219 209 68 136 1,700
317 276 293 238 241 61 172 1,597
362 187 226 230 262 47 175 1,489
110 42 60 56 59 8 58 395
123 60 63 60 64 11 49 429
86 63 60 58 50 30 41 389
112 47 61 58 54 10 60 402
431 212 245 232 227 59 208 1,614
119 51 64 59 58 8 60 420
135 62 60 62 56 13 50 438
102 53 65 62 56 29 50 416
126 45 65 60 58 10 50 414
482 211 255 243 228 60 210 1,688
525 201 274 255 240 63 210 1,768
565 221 295 266 253 67 210 1,876
28.0% 20.9% 20.4% 28.0% 17.6% 16.7% 20.5% 22.1%
26.1% 18.1% 23.5% 31.5% 20.5% 18.3% 27.6% 23.2%
25.1% 13.2% 19.0% 31.3% 22.6% 15.2% 29.0% 21.7%
28.1% 12.5% 21.1% 31.7% 21.4% 12.0% 34.1% 23.1%
29.5% 16.7% 23.5% 32.4% 23.6% 15.5% 32.6% 25.0%
22.6% 17.1% 20.7% 31.7% 19.3% 29.6% 27.6% 22.4%
27.0% 15.0% 21.0% 32.0% 21.0% 15.0% 37.3% 23.9%
26.9% 15.4% 21.5% 32.0% 21.4% 19.3% 33.0% 23.6%
28.0% 15.0% 22.0% 32.5% 22.0% 12.0% 35.1% 24.1%
30.0% 17.0% 22.0% 32.5% 22.0% 18.0% 32.3% 24.9%
25.0% 15.0% 22.0% 32.5% 22.0% 27.5% 33.3% 23.7%
28.0% 15.0% 22.0% 32.5% 22.0% 15.0% 31.3% 24.1%
27.8% 15.5% 22.0% 32.5% 22.0% 19.2% 33.0% 24.2%
29.0% 15.0% 23.0% 33.0% 22.5% 20.0% 32.8% 24.8%
30.0% 16.0% 24.0% 33.5% 23.0% 21.0% 32.6% 25.5%
Source: Company data, Goldman Sachs Credit Research estimates.
56
December 13, 2011
High Yield
Exhibit 59: Caesars Entertainment Operating Company Financial model

($, millions)
$mm 2008 2009 2010 1Q11 2Q11 3Q11 4Q11E 2011E 1Q12E 2Q12E 3Q12E 4Q12E 2012E 2013E 2014E
Net revenues yoy % change Casino expenses Food and beverage exp Rooms expense Property, G&A and corp Interest expense, net of int cap Adjusted EBITDA Adj. EBITDA margin y-o-y % growth Capital expenditures Interest paid Taxes paid (refund) Free cash flow Proceeds (repayment) of debt Other Change in cash
7,695 -5.5% 3,662 402 139 1,873 1,794 1,643 21.3% -17.5% 1,182 1,279 17 (826) 5,700 (5,291) (418)
6,873 -10.7% 3,267 345 118 1,620 1,679 1,550 22.5% -5.7% 438 1,557 31 (476) 1,134 (537) 121
6,856 -0.2% 3,290 386 155 1,607 1,782 1,465 21.4% -5.4% 136 1,723 (190) (203) (165) 409 40
1,708 -0.2% 785 101 41 414 454 362 21.2% -5.5% 34 184 (7) 151 (15) (167) (32)
1,718 0.8% 773 106 45 401 501 398 23.2% 16.0% 45 635 2 (284) 820 (474) 62
1,734 -3.0% 793 110 45 425 427 372 21.5% -4.4% 62 395 2 (87) (12) 228 128
1,684 1.7% 766 101 42 404 398 381 22.6% 8.7% 139 398 (150) (6) (6) (12)
6,843 -0.2% 3,117 418 172 1,644 1,780 1,513 22.1% 3.2% 279 1,612 (152) (227) 787 (414) 147
1,744 2.1% 793 100 39 410 393 412 23.6% 13.8% 152 393 (134) (6) (140)
1,761 2.5% 801 101 40 414 393 416 23.6% 4.5% 153 393 (130) (6) 418 282 908 7,192 3,296 5,518 2,888 18,893 4.6x 6.6x 10.1x 12.0x 12.0x 4.0x 6.1x 9.6x 11.4x 11.4x 1.06x 0.65x 4.75x 3.98x
1,753 1.1% 798 96 39 412 393 418 23.8% 12.3% 153 393 (127) (6) (133) 775 7,186 3,296 5,518 2,888 18,887 4.4x 6.4x 9.8x 11.6x 11.6x 3.9x 6.0x 9.4x 11.1x 11.1x 1.06x 0.65x 4.75x 3.94x
1,720 2.2% 783 95 39 404 393 410 23.9% 7.7% 152 393 (134) (6) (140) 635 7,180 3,296 5,518 2,888 18,882 4.3x 6.3x 9.7x 11.4x 11.4x 4.0x 5.9x 9.3x 11.0x 11.0x 1.04x 0.64x 4.75x 3.95x
6,978 2.0% 3,175 393 157 1,640 1,572 1,656 23.7% 9.4% 609 1,572 (526) (24) 418 (131) 635 7,180 3,296 5,518 2,888 18,882 4.3x 6.3x 9.7x 11.4x 11.4x 4.0x 5.9x 9.3x 11.0x 11.0x 1.04x 0.64x 4.75x 3.95x
7,136 2.3% 3,229 366 143 1,641 1,570 1,799 25.2% 8.7% 250 1,570 (20) (149) (169) 466 7,156 3,296 5,518 2,763 18,733 4.0x 5.8x 8.9x 10.4x 10.4x 3.7x 5.5x 8.6x 10.2x 10.2x 1.15x 0.88x 4.75x 3.72x
7,348 3.0% 3,307 367 147 1,653 1,560 1,916 26.1% 6.5% 294 1,560 61 (24) 38 504 7,133 3,296 5,518 2,763 18,709 3.7x 5.4x 8.3x 9.8x 9.8x 3.5x 5.2x 8.1x 9.5x 9.5x 1.22x 0.86x 4.75x 3.72x
Cash & equivalents 447 569 619 588 650 778 766 766 626 Debt summary (excludes discount): Senior secured (1st lien) bank debt 7,729 7,262 6,805 6,798 7,215 7,209 7,203 7,203 7,197 38 2,350 2,875 2,868 3,302 3,296 3,296 3,296 3,296 Sr sec (1st lien) debt (incl. notes & Ches Senior secured (2nd lien) debt 1,062 4,768 5,518 5,518 5,518 5,518 5,518 5,518 5,518 Senior unsecured debt 8,789 2,818 3,096 2,874 2,905 2,888 2,888 2,888 2,888 Senior subordinated debt 570 155 Total debt 18,189 17,354 18,295 18,057 18,939 18,911 18,905 18,905 18,899 Credit statistics (a) Senior secured (1st lien) bank lvg 4.7x 4.7x 4.6x 4.7x 4.8x 4.9x 4.8x 4.8x 4.6x Senior secured (1st lien) total lvg 4.7x 6.2x 6.6x 6.7x 7.0x 7.1x 6.9x 6.9x 6.7x Senior secured (2nd lien) leverage 5.3x 9.3x 10.4x 10.5x 10.7x 10.8x 10.6x 10.6x 10.2x Senior leverage 10.7x 11.1x 12.5x 12.5x 12.6x 12.8x 12.5x 12.5x 12.1x Total leverage 11.0x 11.2x 12.5x 12.5x 12.6x 12.8x 12.5x 12.5x 12.1x Net senior secured (1st lien) bank lvg 4.4x 4.3x 4.2x 4.3x 4.4x 4.3x 4.3x 4.3x 4.2x Net senior secured (1st lien) total lvg 4.4x 5.8x 6.2x 6.3x 6.6x 6.6x 6.4x 6.4x 6.3x Net senior secured (2nd lien) lvg 5.1x 8.9x 9.9x 10.1x 10.3x 10.3x 10.1x 10.1x 9.8x Net senior leverage 10.4x 10.7x 12.1x 12.1x 12.2x 12.2x 12.0x 12.0x 11.7x Net total leverage 10.7x 10.8x 12.1x 12.1x 12.2x 12.2x 12.0x 12.0x 11.7x Interest coverage 0.67x 0.93x 0.75x 0.80x 0.79x 0.87x 0.96x 0.96x 1.05x Interest coverage, net of capex -0.03x 0.94x 1.08x 0.94x 0.96x 0.93x 0.65x 0.65x 0.64x Credit facility covenant test 4.75x 4.75x 4.75x 4.75x 4.75x 4.75x 4.75x 4.75x 4.75x Covenant leverage (net 1st lien bank) 3.53x 3.90x 3.80x 3.93x 3.95x 3.89x 4.22x 4.26x 4.21x (a) credit statistics are not based upon credit facility covenants and exclude the benefit of yet-to-be-realized cost savings, potential equity cures, etc.
Capitalization Harrah's Operating Company (excludes $5.0B of CMBS debt) Revolver Term loan B due 2015-2018 Chester Downs TL, Octavius TL & other secured debt 11.25% senior secured (1st lien) nts due 2017 Total senior secured debt 10% senior secured (2nd lien) nts due 2015 10% senior secured (2nd lien) nts due 2018 12.375% senior secured (2nd lien) nts due 2018 Total senior secured (2nd lien) debt 10.75% sr nts (guaranteed) nts due 2016 & other Total senior (guaranteed) debt 5.625% senior notes due June 2015 6.5% senior notes due June 2016 5.75% senior notes due Oct 2017 Other senior notes Total debt (face value)
3Q11 7,209 1,201 2,095 10,505 215 4,553 750 16,023 490 16,513 792 573 539 494 18,911
Lvg
Liquidity Revolver Size Letters of Credit & other Borrowings Revolver Availability 7.1x Cash Liquidity
3Q11 1,207 127 1,080 778 1,858
Debt Schedule 2011 2012 2013 2014 2015+
3Q11 12 24 149 24 12,418
10.8x Description Caesars Entertainment operates 52 casinos primarily in the U.S. and UK 11.1x under mostly the Harrah's, Caesars and Horseshoe brand names. HET's corporate structure includes Caesars Ent. Operating Co. (OpCo, or HOC) which owns/operates 46 casinos and its CMBS property (PropCo) which is secured by six properties. HET properties have over 42,000 hotel rooms and 3 million square feet of casino floor space. HET also operates the World 12.8x Series of Poker tournament circuit. In January 2008, HET was acquired by TPG Capital and Apollo Management.
57
December 13, 2011
High Yield
Pinnacle Entertainment: Sell the 8.75s of 2020

Exhibit 60: Pinnacle Entertainment benchmark securities
GS Rating IL U Size (MM) $450 $350 Coupon (%) 8.625 8.750 Priority Maturity Senior 01-Aug-17 Sr Sub Nts 15-May-20 Agency Ratings B1/BB Caa1/B Next Call Price Date 104.313 01-Aug-13 104.375 15-May-15 Bid Price 106.000 98.000 YTW (%) 6.73 9.09 STW (bp) 638 711 Z-Spread (bp) 584 730

Pinnacle Entertainment Inc. (PNK, In-Line/Underperform) is pursuing various expansion opportunities in 2012 that will require sizable capital expenditures. In Louisiana, PNK expects to complete its $368 million Baton Rouge casino project in the summer of 2012. The property includes a 74,000 square-foot gaming floor, 1,500 slots, 50 table games, one poker room, a 12-story 206-room hotel, a multi-purpose event center with concert seating for 1,600 people, and outdoor festival grounds with capacity for up to 2,500 people. In Missouri, PNK is moving forward with an $82 million expansion of its River City casino. The project includes a parking garage with 1,700 additional parking spots, a 200-room hotel tower and a multi-purpose event center with 10,000 square feet. Construction is scheduled to begin in 1Q2012 and is expected to be complete in 2H2013. In Ohio, PNK expects to build out its Cincinnati-based racetrack with a yet-to-be-determined budget and number of video lottery terminals (VLTs), once an existing lawsuit is rectified. While the VLTs will provide additional growth, the expansion of gaming in Ohio, including a new all-inclusive casino in downtown Cincinnati operated by Caesars Entertainment, will put pressure on its Indiana-based Belterra Casino. We believe the 5.0x-levered PNK 8.75% subordinated notes of 2020 at 98 (YTW= 9.1%, STW= 711 bp) trade too rich compared to the 2.0x-levered PNK 8.625% senior notes of 2017 at 106 (YTW= 6.7%, STW= 638 bp) and other regional gaming operators. The secured gaming paper of Borgata (BORGAT, Outperform) and Midwest Gaming (MWGAME, Not Covered) offer more attractive yield and solid asset coverage in secured gaming paper. For instance, the 5.1x-levered BORGAT 9.875% senior secured notes due 2018 trade at 89.75, offering YTW of 12.2% with STW of 1,082 bp. Risks to our view include a rapid improvement in visitation and stronger than expected growth in rated play and spend per visit.

3Q2011 revenue was $296 million, up 7% yoy. The revenue increase was driven by L'Auberge du Lac (13% yoy) and strong performance by the two properties in St. Louis (+7% yoy). We believe the strength at L'Auberge is driven by the strong fundamentals of the local gulf coast economies, which benefit from high oil prices. 3Q2011 adjusted EBITDA was $69 million, up 16% yoy, which is a deceleration from the 33% yoy increase in 2Q2011. Gross margin was 58.6%, basically flat vs. 58.8% a year earlier. PNK continues to do a good job with expense management as general & administrative expenses, excluding stock comp, improved to 18.2% of revenues from 19.8% a year earlier. As a result, EBITDA margins increased to 23.2%, up from 21.4% a year earlier. PNK noted
58
December 13, 2011
High Yield
that Tropical Storm Lee reduced EBITDA at its Boomtown New Orleans casino by $1 million. Total debt was $1.2 billion, up slightly from $1.19 billion at 2Q2011. Cash on hand was $83 million, down from $142 million at 2Q2011. Net leverage increased to 4.7x from 4.5x due in part to increased project investment, offset by debt repurchases. Total liquidity remained solid at $451 million. For 2012, we expect revenue to increase 5% yoy to $1.21 billion as a result of low- to midsingle-digit revenue growth at its Louisiana properties, offset by weakness at Belterra in Southern Indiana following the opening of Cincinnatis first casino midyear and disruption at River City in St. Louis as construction begins on the parking garage. We are forecasting adjusted EBITDA of $265 million (up 8% yoy). We expect PNK to burn $144 million of cash, primarily to fund $284 million of capital expenditures and $106 million of interest payments. As a result, we expect net leverage to remain unchanged at 4.7x at the end of 2012 versus 3Q2011. In 2013, we expect revenues will increase 10% yoy to $1.32 billion as a result of a full year of operations at LAuberge Baton Rouge and benefits from the opening of the hotel tower at River City in the fall 2013. We anticipate adjusted EBITDA will increase 13% yoy to $299 million, resulting in net leverage of 4.0x.
Exhibit 61: Gaming relative value comparison

($, millions)
$ in millions YE December 31 GS rating Coupon Type Ratings Outlook Issue size Maturity Next call date Next call price Bid price Yield-to-Worst Spread-to-Worst (bp) Z-Spread (bp) Leverage Net leverage SPL 5-year CDS (a) LTM results Net revenues Adjusted EBITDA Adjusted EBITDA margin Total debt Cash & S-T investments Total net debt Total leverage Net leverage Interest coverage Marina District Finance Company (BORGAT) OP 9.875 Sr Sec Nts B2/BBStable/Stable $394 8/15/2018 8/15/2014 104.938 89.750 12.155 1,082 1,065 5.1x 4.9x 213 Boyd Gaming Corp. Caesars Ent. Operating Company (BYD) (HET) OP IL OP IL 9.125 7.125 11.250 10.000 Sr Nts Sr Sub Nts Sr Sec (1st lien) Nts Sr Sec (2nd lien) Nts B3/B Caa1/CCC+ B3/B -/CCC Stable/Stable Stable/Stable Stable/Stable -/Stable $500 $241 $2,095 $4,553 12/1/2018 2/1/2016 6/1/2017 12/15/2018 12/1/2014 Current 6/1/2013 12/15/2013 104.563 103.563 105.625 105.000 93.500 86.500 104.500 62.750 10.461 11.302 9.686 20.156 905 1,068 934 1,872 889 1,030 884 1,864 6.3x 7.4x 7.1x 10.8x 5.9x 6.9x 6.6x 10.3x 143 145 132 173 27+500 27+500 53+500 53+500 2,281.5 452.0 19.8% 3,328.4 187.1 3,141.3 7.4x 6.9x 1.9x 522.2 3,663.5 8.1x 6,814.4 1,482.1 21.7% 18,910.9 778.2 18,132.7 12.8x 12.2x 0.9x NA NA NA MGM Resorts International Pinnacle Entertainment, Inc. (MGM) (PNK) IL OP IL U 11.125 7.625 8.625 8.750 Sr Sec Nts Sr Nts Sr Nts Sr Sub Nts Ba2/B+ B3/BB1/BB Caa1/B Stable/Stable Stable/Stable Stable/Stable Stable/Stable $850 $743 $450 $350 11/15/2017 1/15/2017 8/1/2017 5/15/2020 5/15/2013 MW 8/1/2013 5/15/2015 105.563 T+50 bps 104.313 104.375 113.000 94.000 106.000 98.000 5.304 9.123 6.729 9.093 511 830 638 711 466 791 584 730 NA 9.4x 2.0x 5.0x NA 9.0x 1.7x 4.7x NA 89 317 142 14+500 6,195.0 1,285.7 20.8% 12,020.7 442.1 11,578.6 9.3x 9.0x 1.2x 4,834.5 16,413.1 12.8x 1,156.7 239.5 20.7% 1,199.7 83.3 1,116.4 5.0x 4.7x 2.3x 589.7 1,706.1 7.1x
722.7 154.4 21.4% 783.7 32.2 751.5 5.1x 4.9x 1.9
NA Market capitalization Enterprise value (EV) NA EV/EBITDA NA (a) Boyd 5-year CDS references the senior subordinated debt.
Source: Company data, Goldman Sachs Credit Research.
Company description
Pinnacle Entertainment (PNK) owns and operates seven casinos in the US, located in southeastern Indiana; Lake Charles, New Orleans, and Bossier City in Louisiana; and St. Louis, Missouri; and owns a racetrack in Ohio. It has entered a definitive agreement to sell
59
December 13, 2011
High Yield
its facility in Reno, Nevada. In August 2011, PNK acquired a 26% ownership interest in Vietnamese casino developer Asian Coast Development (Canada) Ltd. PNK has one property under development in Baton Rouge, Louisiana, scheduled to open late summer 2012. Exhibit 62: Pinnacle Entertainment Financial model
($, millions)
$mm Total Revenues year-over-year % change Gaming expense Food & beverage expense Lodging expense Hotel & RV park expense Other operating expenses COGS % of revenues G&A (excluding stock comp) % of revenues Depreciation and Amortization % of net revenues Pre opening and development costs % of revenues Stock-based compensation Writedowns and other charges Operating Income Interest expense, net of capitalized int Other non-operating income Earnings before taxes Adjusted EBITDA Adjusted EBITDA Margin % year-over-year % change Capital expenditures Interest paid Taxes paid Free cash flow Dispositions (acquisitions) Debt issuance (retirement) Equity issuance (repurchases) Dividends paid Other Net change in cash Cash & Equivalents Long-term Debt LTM EBITDA Senior leverage Total leverage Net leverage Interest coverage 2009 1,035.9 -0.8% 540.1 61.4 23.8 21.3 646.5 62.4% 226.1 21.8% 104.4 10.1% 25.8 2.5% 12.2 208.5 (187.7) 70.5 3.6 (254.5) 170.0 16.4% 7.5% 226.4 53.5 0.1 (110.1) 0.4 112.9 0.6 9.8 13.6 129.6 1,063.3 170 2.8x 6.3x 5.5x 3.2x 1Q10 267.4 3.2% 133.1 15.9 5.2 4.6 158.7 59.4% 55.4 20.7% 26.1 9.8% 8.9 3.3% 1.4 (3.1) 20.0 21.0 (1.4) (2.4) 53.3 19.9% 5.8% 65.9 24.6 0.4 (37.5) 1.5 43.1 1.1 (3.8) 4.3 133.9 1,106.6 173 3.0x 6.4x 5.6x 2.2x 2Q10 273.6 2.7% 135.6 18.1 5.8 5.8 165.4 60.5% 58.8 21.5% 29.3 10.7% 2.1 0.8% 2.1 31.5 (15.7) 27.4 (0.3) (43.4) 52.2 19.1% 6.7% 27.5 18.9 2.6 3.2 37.2 70.0 6.6 (46.7) 70.4 204.3 1,176.0 176 2.6x 6.7x 5.5x 2.8x 3Q10 275.9 4.0% 136.2 17.3 6.0 2.8 162.3 58.8% 54.5 19.8% 27.9 10.1% 1.2 0.4% 1.3 5.1 23.5 27.9 0.1 (4.3) 59.1 21.4% 36.9% 30.1 20.5 1.0 7.5 11.1 3.0 2.5 24.1 228.4 1,176.3 192 2.3x 6.1x 4.9x 2.9x 4Q10 274.0 11.8% 139.7 16.7 5.3 4.8 166.5 60.7% 57.2 20.9% 28.4 10.4% 1.7 0.6% 1.5 (1.1) 19.9 26.8 0.0 (6.9) 50.4 18.4% 83.0% 59.0 31.9 (11.2) (29.3) 0.5 1.2 (6.0) (33.5) 194.9 1,176.6 215 2.1x 5.5x 4.6x 1.6x 2010 1,102.4 6.4% 544.5 68.0 22.3 18.1 652.9 59.2% 225.9 20.5% 111.7 10.1% 13.9 1.3% 6.3 32.5 59.2 103.1 (1.6) (45.5) 226.4 20.5% 33.2% 182.5 95.9 (7.3) (44.7) 50.4 113.1 11.9 (65.3) 65.3 194.9 1,176.6 226 2.0x 5.2x 4.3x 2.4x 1Q11 287.7 7.6% 143.4 16.8 5.3 5.4 171.0 59.4% 54.9 19.1% 26.7 9.3% 2.2 0.8% 1.5 0.7 30.8 26.2 0.1 4.7 61.4 21.4% 15.2% 38.3 19.2 (0.4) 4.3 0.9 (0.0) 2.4 (59.5) (51.9) 143.0 1,176.9 223 2.0x 5.3x 4.6x 3.2x 2Q11 299.1 9.3% 148.7 19.5 5.6 9.4 183.2 61.3% 56.9 19.0% 26.5 8.9% 2.6 0.9% 2.3 5.9 21.6 25.7 0.1 (3.9) 59.0 19.7% 13.0% 40.8 22.4 1.6 (5.7) 0.0 10.0 0.4 (5.5) (0.8) 142.2 1,187.2 230 2.0x 5.2x 4.5x 2.6x 3Q11 295.9 7.2% 142.6 18.4 5.5 6.8 173.4 58.6% 53.8 18.2% 25.8 8.7% 2.5 0.8% 1.6 1.3 37.5 24.2 (0.6) 12.7 68.7 23.2% 16.2% 31.7 24.0 (4.1) 17.0 (96.0) 12.0 0.7 7.4 (58.9) 83.3 1,199.6 239 2.0x 5.0x 4.7x 2.9x 4Q11E 272.0 -0.7% 136.4 16.0 5.7 3.8 162.0 59.5% 54.4 20.0% 30.0 11.0% 2.7 1.0% 3.0 19.9 20.0 2.0 1.9 55.7 20.5% 10.4% 60.9 25.0 5.0 (35.3) 50.1 8.6 23.4 106.7 1,249.7 245 2.2x 5.1x 4.7x 2.2x 2011E 1,154.7 4.7% 571.2 70.7 22.1 25.4 689.5 59.7% 220.0 19.1% 109.0 9.4% 10.0 0.9% 8.4 7.9 109.8 96.0 1.6 15.4 244.7 21.2% 8.1% 171.7 90.6 2.1 (19.6) (95.0) 72.0 3.5 (49.1) (88.2) 106.7 1,249.7 245 2.2x 5.1x 4.7x 2.7x 2012E 1,207.9 4.6% 603.9 71.0 24.5 16.6 716.1 59.3% 226.5 18.8% 120.0 9.9% 2.9 0.2% 12.0 130.5 102.0 8.0 36.4 265.4 22.0% 8.4% 283.6 106.0 20.0 (144.3) 100.3 38.6 (5.5) 101.2 1,349.7 265 2.4x 5.1x 4.7x 2.5x 2013E 1,324.1 9.6% 658.4 77.9 26.0 18.2 780.4 58.9% 245.0 18.5% 120.0 9.1% 13.2 1.0% 16.0 149.5 103.4 8.0 54.1 298.8 22.6% 12.6% 107.6 107.4 20.0 63.8 (83.2) (0.2) (19.7) 81.5 1,266.2 299 2.3x 4.2x 4.0x 2.8x
Capitalization Revolver due March 2014 8.625% senior notes due 2017 Total senior debt 7.50% senior sub notes due 2015 8.75% senior sub notes due 2020 Other debt including OID Total debt
3Q11 32 450 482 375 350 (7) 1,200
Lvg
Enterprise Value Shares o/s (mm) Share price Market cap Net debt Enterprise value EV / EBITDA Debt Repayment 2011 2012 2013 2014 2015+ $
Liquidity 62 Cash
3Q11 90
2.0x
5.0x
13.52 Borrowing availability 368 458 840 Liquidity 1,110 1,950 8.1x Description 0 Pinnacle Entertainment owns and operates seven casinos 0 in the U.S. (Indiana, Louisiana,Nevada & Missouri). PNK's 0 River City casino opened in March 2010, and it has one new property planned in Baton Rouge, LA. In August 2011, 10 PNK made a $95 mn investment in a Vietnamese gaming 1,199 joint venture.
60
December 13, 2011
High Yield
Healthcare: Coverage view and recommendations

Erin Blum Goldman, Sachs & Co. erin.blum@gs.com 1-212-855-7718 Cindy Guan Goldman, Sachs & Co. cindy.guan@gs.com 1-212-902-9758 We have a Cautious coverage view on healthcare providers, believing volumes and reimbursement will be continuing headwinds. We also see risk to the Affordable Care Act, which we have estimated as a 3-5% positive for hospital EBITDA, in the event of a Supreme Court decision or a landslide Republican victory in the 2012 election. Volumes should remain sluggish in the near term due to the still-slow economy which impacts demand for elective procedures and leads to more uninsuredand a secular shift stemming from managed care initiatives to discourage utilization. We see risk to reimbursement rates primarily on the public side, where state budgets should continue to hurt Medicaid rates. The Medicare outlook is mostly clear through the 2012 election, although fear could mount if rate cuts/entitlement reforms are prominent in the election debate. We have a Neutral coverage view on pharma/medical devices. The pharma and medical device sectors are facing persistent structural headwinds: Pricing pressure and maturation of products are making top-line organic growth challenging. As a result, we see continued strong acquisition appetite, which poses a risk to leverage. That said, the sector is defensive in a weak economy and, unlike healthcare providers, has limited direct exposure to reimbursement.
Apria Healthcare (AHG): buy A-2s on take-out option

GS TKR Rating AHG OP AHG Size (MM) $700 $318 Coupon Agency (%) Priority Maturity Ratings 11.25 A1 Sr Sec 01-Nov-14 Ba3/BB+ 12.38 A2 Sr Sec 01-Nov-14 B3/BBNext Call Price Date 102.813 01-Nov-12 103.094 01-Nov-12 Bid Price 101.4 92.0 YTW (%) 10.4% 15.9% STW (bp) 1,018 1,570 CDS Sr Uns 5-yr 12/14
We rate Apria Healthcare (AHG) Outperform and recommend investors buy the Apria 12.375% A-2 notes of 2014 because the company may refinance the notes in 1H2012.

The 3Q2011 improvement in EBITDAand our outlook for further improvementmake a refinancing more likely given the high coupons on the bonds (callable as of November 2011). To be clear, we think a refinancing is at least a quarter off as we think the company requires further improvement in operations and strong market conditions. We prefer the A2 bonds over the A-1s as the upside/downside tradeoff is more favorable. For the A-2s, we see $12+ of upside to a spring 2012 takeout compared with a low tick just $2.5 below current pricing (see exhibit below). Exhibit 64: A-2 provide very attractive upside/downside
Current level 11.25% A-1 12.375% A-2 101.4 92.0
Nov 2011 call 105.625 106.188
Nov 2012 call 102.813 103.094
Spring 2012 take out 104.219 104.641
2011 low tick 91.0 89.5
Yield at low tick 15.2% 17.1%
Upside to take out 2.8 12.6
Downside to low tick -10.4 -2.5
61
December 13, 2011
High Yield
Despite solid liquidity, there may be a limited window of opportunity for Apria to execute a refinancing, posing the key risk for the bonds in our view. We considered the following factors:
Long runway on liquidity. Apria has an undrawn $250 mn ABL revolver with a
$100 mn accordion feature. We expect the company to draw on the facility for the first time in 4Q2011 (a bond coupon payment quarter) but to be FCF positive in 2012. Both bonds mature in November 2014.
Need to show another quarter of results. In our view, a refinancing would be

much more effectiveand result in a lower cost of interestif the company produces at least one additional quarter of improved results. Therefore, we do not expect any news until after 4Q reporting, likely in mid- to late March 2012.
Market conditions should be opportune. Because of the markets wariness

around Medicare oxygen (which actually contributes only 8% of Apria sales), and the desire to reduce the coupon, we believe any deal would likely take place during a period of market strength.
Round 2 of competitive bidding adds to risk in late 2012. Competitive bidding is

a Medicare program to reduce its cost of durable medical equipment, including home oxygen, in certain geographic markets. Bidding for round 2, which expands the program to 91 additional markets, is scheduled for spring 2012 and results are expected in fall 2012 with rates taking effect on July 1, 2013. Apria has said its revenue at risk in round 2 is $144 mn. Using the same 30% price reduction realized in round 1, we estimate AHG could lose $11 mn of quarterly revenue and EBITDA. We are projecting quarterly EBITDA grows to $80 mn by early 2013 and so competitive bidding could take it back to about $70 mn, or $280 mn on an annualized basis (leverage of 3.7x vs. 4.2x LTM and 3.4x for 2012E).

There may be a limited window of opportunity to refinance as the company needs at least one more solid quarter and strong market conditions but needs to be ahead of competitive bidding round 2 expected Fall 2012. Refinancing may not happen; unexpected government rate cuts could slow sales.

Apria reported a solid 3Q with EBITDA up 9% sequentially, and we expect modest additional growth in the coming quarters. 4Q2010 and 1Q2011 were low water marks for EBITDA, so the LTM figure should improve as these quarters roll off. In addition we see three reasons to expect operating results to improve from 3Q2011:
SG&A should moderate. The company has completed the hiring and training
stages of its on-shoring revenue cycle management initiative. Labor costs can now shrink a bit as billing/collections employees become more efficient over the next 6-9 months according to management. Therefore, we believe quarterly SG&A can come down by $5-7 mn over the next few quarters.
Bad debt is normalizing. We think there is room for bad debt to be modestly
better than expected. YTD bad debt is 3.0% of revenue and while 4Q has historically ticked up 100 bp over 3Q, a similar increase would put full year bad debt at 3.1%, compared with 3.4% in 2010. Days sales outstanding improved to 53 days from 55 days last quarter but can still improve to closer to the 43-49 days seen in 2009, in our view.
62
December 13, 2011
High Yield
The Humana contract should boost top line. Apria was selected as Humanas
provider of choice for home medical equipment under a multi-year, multi-state agreement, effective September 1. Rotech disclosed that it too has an agreement with Humana so the potential upside to Apria is unclear.
We are using the low price of 2011 $89.5 in mid-October as an estimate of downside in the bonds. This would equate to a yield of 17.1%, or flat to where Rotech is currently trading. Rotech leverage is slightly higher than AHG, and FCF is slightly better, but we see Rotech as a weaker credit due to the much higher exposure to Medicare oxygen (57% of sales compared with about 8% for Apria) and Aprias diversification into home infusion (50% of revenue). Exhibit 65: Apria trades significantly wider than any of our covered provider names and only modestly inside competitor Rotech
$ in millions
IAS* Income Statement Data Net Revenue $2,904 EBITDA $311 EBITDA Margin % 11% Balance Sheet Data Cash $145 Total Debt $1,881 Cash Flow Data Free Cash Flow $137 As a % of Debt 7% Credit Ratios LTM coverage 2.5x Total Debt/LTM EBIT 6.1x EV/LTM EBITDA NA 8.375% of 2019 Bond Priority Sr Nts Price $84.00 Yield/Z-spread 11.65%/1001 LTM Lev through bon 6.1x GS Rating OP Bond Priority Price Yield/Z-spread LTM Lev through bond GS Rating VHS* $6,561 $534 8% $155 $2,346 $90 4% 2.9x 4.4x 5.5x 8% of 2018 Sr Nts $96.25 8.80%/736 4.4x U AHG $2,267 $244 11% $58 $1,018 ($62) -6% KND** $6,049 $459 8% $34 $1,500 ($7) 0% ROHI $491 $119 24% $33 $520 ($15) -3% 2.0x 4.4x NA 10.75% of 2015 1st ln $100.18 10.66%/994 1.9x NC
10.5% of 2018
SCAFF $730 $126 17% $48 $784 $43 6% 2.1x 6.2x NA 10% of 2017 Sr Sub $96.00 10.97%/967 6.2x IL
USPI $602 $204 34% $56 $1,116 $74 7% 3.0x 5.5x NA 8.875% of 2017 Sr Sub $98.00 9.35%/808 5.5x OP
9/30/2011 LTM
Benchmark Pricing
1.8x 1.7x 4.2x 4.6x NA 5.2x 11.25% of 2014 8.25% of 2019 A1 Sr Sec Sr Nts $101.38 $83.00 10.41%/976 11.73%/1008 2.9x 4.6x OP IL
12.375% of 2014
A2 Sr Sec $92.00 15.93%/1520 4.2x NC
2nd ln $75.00 17.16%/1576 4.4x NC
* IAS, VHS, and KND are pro forma for recent acquisitions. Source: Company reports, Goldman Sachs Credit Research.
Company description
Apria provides home respiratory and home infusion services and equipment rental. The company serves over 2 mn patients from 550 service locations. A focus on managed care payers and the high growth home infusion segment (50% of revenue) differentiate Apria from competitors. Apria is owned by Blackstone.
63
December 13, 2011
High Yield
Exhibit 66: Apria Financial model

($, millions)
Fiscal Year Ends December 31 AHG
2009A $1,170 $925
2010A $1,083 $997
2011E $1,159 $1,134
2012E $1,203 $1,247
2013E $1,170 $1,322
2014E $1,136 $1,401
1QA 278 231
2010 2QA 273 245
3QA 270 256
4QA 262 266
2010A 1,083 997
1QA 276 261
2011 2QA 293 284
3QA 293 292
4QE 297 298
2011E 1,159 1,134
PF LTM* 1,165 1,102
Segment revenue Respiration and home medical Infusion therapy Income Statement Net Revenues % growth COGS % of Revenue Prov. for Bad Debt % of Revenue Selling, distribution & admin % of Revenue EBIT Depreciation and Amortization EBITDA EBITDA Margin % % growth Adjusted EBITDA bf cost savings Interest Expense One-time Charges and Loses/(Gains) Income Taxes Cash Flow Statement Cash Flow from Operations Capital Expenditures Free Cash Flow FCF as a % of debt Balance Sheet Cash Bank Debt Series A-1 Series A-2 Other Debt Total Debt Ratios EBITDA/Interest EBITDA - Capex/Interest A-1 Debt/LTM adj EBITDA Total Debt/LTM adj EBITDA LTM FCF as % of Debt
$2,095 (1.7%) $823 39.3% $58 2.8% $1,050 50.1% $115 173 $288 13.8% (6.6%) $377 129 88 (8)
$2,081 (0.7%) $834 40.1% $71 3.4% $1,067 51.3% $105 129 $233 11.2% (19.1%) $299 131 66 (8)
$2,293 10.2% $938 40.9% $72 3.1% $1,211 52.8% $67 140 $207 9.0% (11.2%) $264 132 57 (21)
$2,450 6.9% $1,024 41.8% $81 3.3% $1,205 49.2% $136 146 $282 11.5% 35.9% $302 130 20 4
$2,492 1.7% $1,058 42.5% $85 3.4% $1,190 47.8% $154 146 $300 12.0% 6.4% $300 130 0 8
$2,538 1.8% $1,094 43.1% $86 3.4% $1,212 47.7% $141 146 $287 11.3% (4.3%) $287 130 0 4
$509 (1.5%) $203 39.9% $16 3.1% $258 50.6% $31 33 $64 12.6% (4.3%) $82 33 18 (1)
$518 (0.8%) $208 40.2% $13 2.5% $259 50.0% $37 32 $69 13.3% (5.9%) $85 33 16 1
$526 1.3% $208 39.5% $11 2.1% $271 51.5% $35
$528 (1.6%) $215 40.7% $31 5.9% $279 52.9% $2
$2,081 (0.7%) $834 40.1% $71 3.4% $1,067 51.3% $105
$537 5.5% $218 40.6% $20 3.8% $297 55.3% $1
$576 11.2% $235 40.8% $17 2.9% $303 52.6% $20
$585 11.2% $240 41.0% $15 2.5% $308 52.6% $22 38 $59 10.2% (11.5%) $75 33 15 (7)
$595 12.7% $245 41.2% $21 3.5% $303 51.0% $24
$2,293 10.2% $938 40.9% $72 3.1% $1,211 52.8% $67
$2,267
32 31 129 $67 $33 $233 12.8% 6.2% 11.2% (3.5%) (58.0%) (19.1%) $84 $48 $299 33 17 2 33 15 (11) 131 66 (8)
32 34 $33 $54 6.2% 9.3% (48.3%) (22.3%) $50 $68 33 17 (11) 33 15 (3)
36 140 $61 $207 10.2% 9.0% 84.9% (11.2%) $71 $264 33 10 0 132 57 (21)
$183 8.0% $244 132 62 (32)
$169 (151) 19 1.8% $158 0 700 318 4 1,021
$85 (117) (32) -3.2% $109 0 700 318 2 1,019
$101 (149) (48) -4.7% $42 10 700 318 1 1,028
$183 (140) 43 4.2% $75 0 700 318 1 1,018
$208 (148) 60 5.8% $135 0 700 318 1 1,018
$203 (160) 43 4.2% $177 0 700 318 1 1,018
$15 (27) (12)
$20 (28) (9)
$59 (29) 30
($9) (32) (42)
$85 (117) (32) -3.2% $109 0 700 318 2 1,019
$34 (34) 0
($16) (42) (58)
$73 (38) 36
$9 (35) (26)
$101 (149) (48) -4.7% $42 10 700 318 1 1,028
$84 (146) (62) -6.1% $58 0 700 318 1 1,018
$133 0 700 318 3 1,021
$116 0 700 318 3 1,020
$152 0 700 318 2 1,020
$109 0 700 318 2 1,019
$85 0 700 318 2 1,019
$27 0 700 318 1 1,018
$58 0 700 318 1 1,018
$42 10 700 318 1 1,028
2.2x 1.1x 1.9x 2.7x 2%
1.8x 0.9x 2.3x 3.4x -3%
1.6x 0.4x 2.7x 3.9x -5%
2.2x 1.1x 2.3x 3.4x 4%
2.3x 1.2x 2.3x 3.4x 6%
2.2x 1.0x 2.4x 3.5x 4%
2.0x 1.1x 1.9x 2.8x 2%
2.1x 1.2x 1.9x 2.8x 1%
2.1x 1.2x 2.0x 2.9x -1%
1.0x 0.0x 2.3x 3.4x -3%
1.8x 0.9x 2.3x 3.4x -3%
1.0x 0.0x 2.6x 3.8x -2%
1.6x 0.3x 2.8x 4.1x -7%
1.8x 0.7x 2.9x 4.2x -6%
1.9x 0.8x 2.7x 3.9x -5%
1.6x 0.4x 2.7x 3.9x -5%
1.4x 0.3x 2.9x 4.2x -6%
*PF includes 5 additional months of the Praxair acquisition assuming $100mn in annual revenue and an 8% EBITDA margin. Source: Company data, Goldman Sachs Credit Research.
Tenet Healthcare (THC): Sell CDS, 150+bp wide to HCA

GS TKR THC THC Rtg OP IL Size (MM) $900 $600 Cpn (%) 6.25 8.00 Priority Sec Sr Nts Maturity 01-Nov-18 Agency Ratings B1/BBNext Call Price MW Date T+50 Bid Price $100.75 $98.75 YTW STW (%) 6.1 8.2 (bp) 525 734 CDS Snr Uns 5-yr 8.75/9.75 (736/767)
02-Aug-20 Caa1/CCC+ $104.00 01-Aug-15
We recommend investors sell Tenet Healthcare (THC) CDS, which trades too wide to HCA CDS in our view. We rate THC unsecured notes In-Line.
64
December 13, 2011
High Yield

We think THC CDS trades too wide relative to other hospitals. THC has reduced leverage to 3.9x and is now among the lowest-levered of the group. Also, while LTM free cash flow is just breakeven, it has improved and we expect further improvement as a result of EBITDA growth, lower cash interest expense, and improved accounts receivable (AR). Tenet has achieved impressive margin improvement over the past 5 years, going from an industrylagging 7.5% to 12% in the LTM period, which is in line with the sector. Despite this, we continue to see the THC portfolio of hospitals as less favorable than peers due to its urban focus in highly competitive markets, but we like managements strategy of investing in higher-growth outpatient services. As discussed above in the industry section, healthcare providers are facing several challenges such as ongoing volume weakness, budget-related reimbursement cuts, and potential revisions to the insurance expansion under the Affordable Care Act. However, we believe positive 4Q earnings could be a catalyst for CDS tightening: At a mid-November conference, management commented that 4Q volumes thus far had been strong. We believe investors are doubtful of Tenets ability to reach its full-year EBITDA guidance, which implies $324 mn for 4Q, a $129 mn increase over 3Q and 15% yoy growth. However, we see the target as achievable due to the factors described by the company on its 3Q earnings call. See exhibit below.
Exhibit 68: We see Tenets 4Q guidance as achievable

Summary of 3Q to 4Q expected variance per the company, and our assessment of each facto
Amount $26 15 22 20 5 12 >29 129
Factor CA provider fee HIT incentive payment Higher discount rate for valuing workers comp/ malpractice expense Cost efficiencies Medicare pricing Bad debt reduction Seasonality; resolution of old accounts
Notes Highly certain; or easy to adjust for if delayed again $5mn Medicaid (highly certain); $10mn Medicare (likely to be delayed following strict accounting guidance) Benefit could be lower--7 yr treasury is 1.3% vs ~1.5% at time of guidance Could be higher based on increased guidance for 2012 savings of $80mn Highly certain--1.1% inpatient update 4Q bad debt is typically lower than 3Q in both dollar and % terms 3Q to 4Q pick up ranged from negative $22mn to positive $78mn with a median of $30mn in last 5 years
We think THC CDS looks particularly attractive when compared to the spread differentials in hospital bonds (see Exhibits 69 and 70). In CDS, THC trades ~155 bp wide to HCA and ~232 bp wide to HMA sr CDS. By contrast, in bonds, THC trades only ~93 bp and ~105 bp wide to HCA and HMA respectively, despite the THC bonds being shorter than HCA or HMA.
65
December 13, 2011
High Yield
Exhibit 69: THC CDS is ~250 bp above a best fit line of hospital CDS
CDS vs. LTM leverage
1000 900 800 CYH THC
Exhibit 70: but in bonds THC is only 75 bp wide to best fit line, despite bonds being shorter than comps
z-spread vs. LTM leverage
900 800 700 Zspread(bps) 600 500 400
CDS(bps)
700 600 500 400 300 UHS 200 3.0x 3.5x
~250bp
~75bp
UHS
THC HCA HMA
CYH
HCA HMA
300
4.0x Leverage 4.5x 5.0x
200 3.0x 3.5x 4.0x Leverage 4.5x 5.0x
CYH THCvs 69
HCA 155
HMA 232
UHS 498
CYH THCvs 17
HCA 93
HMA 105
UHS 78

Fourth quarter earnings may be less favorable than expected; larger than expected share repurchase.

In mid-September, Tenet revised its 2011 outlook saying it expected to be at the low end of its $1,175-1,275 mn adjusted EBITDA range. 3Q results then came in ahead of the revised guidance, primarily because July and August were soft but September improved. On its 3Q conference call, Tenet characterized the weakness of July and August as likely an anomaly rather than the beginning of a longer trend because of (1) favorable developments in malpractice expense, (2) improving outpatient volumes, and (3) stabilization in Medicare acuity in September. More broadly, in 2012, we expect Tenets financial performance to continue its multi-year improving trend (see Exhibits 71 and 72) due to:
Favorable volume trends. Tenet volumes have outpaced most of the group in
recent quarters. THC same-facility admissions were positive 1.5% in 3Q2011, second only to HCA (see Exhibit 73). In addition, surgeries (which tend to have higher profitability) were up a group-leading 3.2% on a same-facility basis.
Cost initiatives. More than the other hospitals, we believe Tenet has been focused
on long-term cost efficiencies from standardization of care. The company expects its Medicare Performance Initiative to generate $80 mn of savings in 2012, up from previous guidance of $50 mn.
Improved cash flow. EBITDA growth plus lower cash interest expense (due to
refinancing and the termination of a swap) should benefit FCF in 2012. In addition,
66
December 13, 2011
High Yield
AR performance should improve as 3Q2011 was hampered by consolidating offices and new processes from intermediaries.
Outpatient acquisitions. Tenet has acquired 10 outpatient assets in 2011 and

expects to complete an additional 5 by the end of the year. THC has said it is comfortable taking leverage slightly higher for the right opportunity but the deals tend to be small ($56 mn spent ytd).
Exhibit 71: EBITDA has steadily improved since the completion of the divestitures
EBITDA and EBITDA margin
$1,200 $1,000 $800 $600 $400 $200 $0 2006 2007 2008 2009 2010 LTM EBITDA EBITDAmargin $671 7.5% $980 $734 10.9% $636 8.3% 7.1% 6.0% 4.0% 2.0% 0.0% $1,132 $1,050 11.4% 11.9% 14.0% 12.0% 10.0% 8.0%
Exhibit 72: And free cash flow has moved to positive

FCF as a % of debt
5.0% 0.1% 0.0% 0.7% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 2006 2007 2008 2009 2010 LTM 24.3% 8.6% 7.0% 0.1%
Source: Company data.
Source: Company data.
Exhibit 73: THC operating performance has been among best of peers in recent quarters (3Q summary hospital performance)
Rev/adj admission 5.0% 0.1% 3.8% 2.4% 1.8% 3.5% 0.6% s/s admits 7.0% 3.2% 1.8% 0.2% 1.5% 2.6% 1.0% s/sadj admits 1.1% 3.8% 0.8% 0.9% 2.3% 0.3% 2.2% s/s surgeries** 2.8% 0.9% 0.2% 6.7% 3.2% NA 1.2% EBITDA growth 2.7% 4.0% 14.0% 6.0% 4.0% NM NM yoyuncomp care*** +140bps +190bps 50bps +120bps +50bps 341bps +450bps Medicare acuity 1.1% 1.8% 1.2% 0.8% 1.4% yoyup slightlyup
CYH HCA HMA LPNT THC UHSacute VHS*
Source: Company reports. *VHS reported 1QFY12. **HCA and VHS s/s surgery growth is only s/s IP surgeries. ***CYH's yoy uncomp care number is a YTD number.
Company description
Tenet Healthcare is a hospital operator focused on urban markets. THC operates 50 hospitals in 11 states with a concentration in Florida, Texas, and California. The company considers itself well-positioned to benefit from expanded insurance coverage under the Affordable Care Act due to the high level of uninsured patients in its markets. Medicare
December 13, 2011
High Yield
contributes 23% of revenue, Medicaid contributes 8%, and managed care contributes 58%. The company also operates a revenue cycle management business called Conifer. Exhibit 74: Tenet Healthcare Financial model
($, millions)
Fiscal Year Ends December 31 THC
2009
2010
2011E
2012E
1Q
2010 2Q
3Q
4Q
2010
1Q
2011E 2Q
3Q
4QE
2011E
LTM 49 13,440 789,423 2.3% 1.5% $9,523
Operating Data Consolidated Hospitals 49 49 49 49 Weighted Avg Licensed Beds 13,460 13,430 13,449 13,453 Equivalent Admissions 786,559 778,505 795,114 805,263 % growth (not ss) (0.3%) (1.0%) 2.1% 1.3% SS admissions growth -0.6% -2.4% Income Statement Net Revenues $9,031 $9,205 $9,640 $9,857 % growth 1.5% 1.9% 4.7% 2.2% Salaries, Wages & Benefits % of Revenue Supplies % of Revenue Other Operating Exp. % of Revenue Provision for Bad Debt % of Revenue EBITDA EBITDA Margin % % growth Depreciation and Amortization Interest Expense Income Taxes Cash Flow Statement Cash Flow from Operations Capital Expenditures Free Cash Flow FCF as a % of Debt Balance Sheet Cash Bank Debt Secured Debt Senior Debt Subordinated Debt Other Debt Total Debt Ratios EBITDA/Interest EBITDA - Capex/Interest Secured Debt/LTM EBITDA Senior Debt/LTM EBITDA Total Debt/LTM EBITDA $3,867 42.8% $1,573 17.4% $1,914 21.2% $697 7.7% $980 10.9% 33.5% $387 445 (23) $3,900 42.4% $1,577 17.1% $1,938 21.1% $740 8.0% $1,050 11.4% 7.1% $394 424 (977) $4,057 42.1% $1,585 16.4% $2,096 21.7% $727 7.5% $1,175 12.2% 11.9% $411 422 118 $4,145 42.1% $1,658 16.8% $2,064 20.9% $781 7.9% $1,209 12.3% 2.9% $411 401 159
49 49 49 49 49 13,431 13,435 13,423 13,429 13,430 195,909 194,828 193,670 194,098 778,505 (2.1%) (0.6%) (1.8%) 0.4% (1.0%) -2.0% -2.0% -3.5% -2.0% $2,339 2.6% $987 42.2% $398 17.0% $467 20.0% $189 8.1% $298 12.7% 8.0% $95 109 3 $2,303 3.3% $969 42.1% $395 17.2% $498 21.6% $173 7.5% $268 11.6% 8.9% $97 107 20 $2,262 3.3% $977 43.2% $390 17.2% $505 22.3% $187 8.3% $203 9.0% (15.4%) $101 107 (1,002) $2,301 1.8% $967 42.0% $394 17.1% $468 20.3% $191 8.3% $281 12.2% 28.9% $101 101 2 $9,205 1.9% $3,900 42.4% $1,577 17.1% $1,938 21.1% $740 8.0% $1,050 11.4% 7.1% $394 424 (977)
49 49 49 49 49 13,457 13,445 13,440 13,453 13,449 200,353 196,862 198,110 199,789 795,114 2.3% 1.0% 2.3% 2.9% 2.1% 0.6% -0.2% 1.5% $2,506 7.1% $1,035 41.3% $404 16.1% $506 20.2% $182 7.3% $379 15.1% 27.2% $101 118 51 $2,374 3.1% $999 42.1% $399 16.8% $528 22.2% $171 7.2% $277 11.7% 3.4% $104 98 18 $2,342 3.5% $1,019 43.5% $388 16.6% $547 23.4% $193 8.2% $195 8.3% (3.9%) $103 100 4 $2,418 5.1% $1,004 41.5% $394 16.3% $515 21.3% $181 7.5% $324 13.4% 15.3% $103 106 45 $9,640 4.7% $4,057 42.1% $1,585 16.4% $2,096 21.7% $727 7.5% $1,175 12.2% 11.9% $411 422 118
$4,020 42.2% $1,585 16.6% $2,049 21.5% $737 7.7% $1,132 11.9%
$409 $417 $75
$425 ($456) ($31) (0.7%) $690 0 2,353 2,141 0 7 4,501
$472 ($476) ($4) (0.1%) $405 0 2,353 1,902 0 6 4,261
$568 ($398) $170 3.9% $247 0 2,540 1,837 0 21 4,398
$792 ($500) $292 6.6% $539 0 2,540 1,837 0 21 4,398
($22) ($83) ($105)
$191 ($77) $114
$128 ($120) $8
$175 ($196) ($21)
$472 ($476) ($4) -0.1% $405 0 2,353 1,902 0 6 4,261
($2) ($116) ($118)
$178 ($82) $96
$148 ($100) $48
$244 ($100) $144
$568 ($398) $170 3.9% $247 0 2,540 1,837 0 21 4,398
$499 ($494) $5 0.1% $185 0 2,540 1,837 0 21 4,398
$589 0 2,353 2,135 0 7 4,495
$711 0 2,353 2,131 0 7 4,491
$398 0 2,353 1,902 0 7 4,262
$405 0 2,353 1,902 0 6 4,261
$267 0 2,353 1,902 0 6 4,261
$264 0 2,353 1,902 0 48 4,303
$185 0 2,353 1,902 0 21 4,276
$247 0 2,540 1,837 0 21 4,398
2.2x 1.2x 2.4x 4.6x 4.6x
2.5x 1.4x 2.2x 4.1x 4.1x
2.8x 1.8x 2.2x 3.7x 3.7x
3.0x 1.8x 2.1x 3.6x 3.6x
2.7x 2.0x 2.3x 4.5x 4.5x
2.5x 1.8x 2.3x 4.4x 4.4x
1.9x 0.8x 2.4x 4.3x 4.3x
2.8x 0.8x 2.2x 4.1x 4.1x
2.5x 1.4x 2.2x 4.1x 4.1x
3.2x 2.2x 2.1x 3.8x 3.8x
2.8x 2.0x 2.1x 3.7x 3.8x
2.0x 1.0x 2.1x 3.8x 3.8x
3.0x 2.1x 2.2x 3.7x 3.7x
2.8x 1.8x 2.2x 3.7x 3.7x
2.7x 1.5x 2.2x 3.9x 3.9x
Source: Company data. Goldman Sachs Credit Research.
68
December 13, 2011
High Yield
Endo Pharmaceutical (ENDP): Sell 2022s ahead of generic risk

GS TKR ENDP ENDP Rtg U NC Size (MM) $500 $400 Cpn (%) 7.00 7.25 Priority Sr. Sr. Maturity 15-Jul-19 Agency Ratings Next Call Price Date Bid Price $104.50 $104.25 YTW (%) 6.04 6.53 Z-Sprd (bp) 470 481
Ba3/BB- $103.50 15-Jul-15
15-Jan-22 Ba3/BB- $103.63 15-Jul-16
We rate Endo Pharmaceutical (ENDP) Underperform and recommend investors sell the Endo 7.25% notes of 2022 ahead of the risk of Watson Pharmaceuticals launching a Lidoderm generic.

We think sub-500 Z-spreads on Endo bonds do not properly price the risk of a generic Lidoderm competitor by early 2013, which we see as more likely than not. Despite several diversifying acquisitions, Lidoderm remains Endos largest product and contributed 28% of LTM pro forma sales. The introduction of a generic typically results in the branded company loosing 60-70% of revenue within 6 months (see Exhibit 76). Without generic competition, we are modeling 2013 leverage of 2.7x, which we estimate would jump to 3.2x with a generic (see Exhibit 77). Street consensus is that Lidoderm will face generic competition only sometime between mid-2014 and early 2015. We think the market is underestimating the risk due to bullish comments made by Endo, which we see as being in direct conflict with comments made by Watson (see Exhibit 78).
Background. Lidoderm, a Lidocaine pain patch, is protected by four patents: two expire in
May 2012, one in 2014 and one in 2015. Watson has challenged the 2014 and 2015 patents. The automatic 30-month stay (which effectively allows the patent challenger to launch a generic at-risk after 30 months even if the court has not yet ruled on the patent litigation) expires in June 2012. Such a launch is called at-risk because the generic company could be liable for treble damages if the patent is ultimately upheld. There are several possible events to watch for that should move bonds:
Watsons ANDA approval. Watson needs approval of its Abbreviated New Drug
Application (ANDA) from the FDA in order to launch a generic Lidoderm. Endo has asked the FDA to require ANDAs to show clinical efficacy rather than just PK blood levels. Watson expects the FDA to stick with its earlier decision not to require clinical studies and expects approval before the expiration of the 30-month stay.
Settlement with Watson. Endo and Watson could reach a settlement whereby
Endo ends the patent litigation and Watson agrees not to launch a generic until after a certain date. Any time pre-2014 would be negative for bonds in our view.
Decision in bench trial. The trial for the patent litigation is scheduled to start
February 6, 2012, with a judgment likely several months later (ideally to come before the 30-month stay expires). Watson won an important pre-trial motion, about which Endo announced that it believes it has good grounds for appeal and that litigation could drag out into 2015.
Expiration of 30-month stay. If the trial has not been decided, Watson has
indicated that it is willing to launch at-risk and has been ramping up its Salt Lake City manufacturing accordingly.
69
December 13, 2011
High Yield
Exhibit 76: Brand sales decline 60-70% within 6 months of generic launch, even for a patch
Brand sales of Duragesic (fentanyl) following generic launch
400
Exhibit 77: We see generic Lidoderm by early 2013 as most likely and project 0.5x leverage impact
EBITDA and leverage impact of various Lido generic dates
LTM Generic launch date Adjustment to LTM period ended Lido sales if no launch Lido sales lost if launch PF Lido sales % of total sales lost Possible mid 2012 6/30/2012 $808 65% $283 17% $210 18% $939 3.9x 3.2x Most Market Likely Consensus early 2013 late 2014 12/31/2013 12/31/2014 $833 $849 65% 65% $291 $297 16% 15% $217 17% $1,075 3.2x 2.7x $119 9% $1,244 2.7x 2.5x
350
300
MYL launches generic Fentanyl Jan 2005. JNJ launched authorized generic with Sandoz Branded Duragesic US sales were down 68% 2Q2005.
Quarterly Sales ($mn)
250
200
Additional generic entrants for generic Duragesic approved Aug 2007
EBITDA lost (40% margin) % EBITDA lost PF EBITDA PF leverage Leverage wo launch
$1,037
150
3.6x
100
50
Quarter
Source: Johnson & Johnson company reports; Mylan company reports.
Exhibit 78: Comments from Endo and Watson show very different expectations for Lidoderm
Recent comments to investors
Timing Endo The probability of a generic coming to market in the 2012 timeframe for Lidoderm is particularly low (6/8/2011) FDA has said in the case of Voltaren Gel that [PK levels are] not sufficient; and if FDA were to provide similar guidance with respect to Lidoderm, it would be at least two years [to do clinicals] (11/10/2011) Watson We are expanding our facility in Salt Lake City. We are approaching this as though we are going to be selling the product as early as 2012 (11/30/2011) FDA has already given guidance on [whether clinical trials are required for a Lidoderm ANDA] and we have followed that guidance. We don't believe we're going to be required to do any more work than what we've already done (11/1/2011) We're expecting a tentative approval before [the end of the 30-month period] (11/30/2011) We like our case. The Markman hearing, we think, was favorable to us and we're pretty excited about where that product opportunity presents itself (11/1/2011)
Regulatory
Litigation
Settlement
If we're not able to prevail on validity and infringement (and we think we've got some very strong defenses in that regard), we think we would have very good grounds for appeal [of the Markman hearing], which extends the timeline into 2015 We are focused on optimizing the value, whether that be a legal decision or a regulatory decision or a business decision; all options remain open on the table (11/29/2011)
Source: Bloomberg transcripts of various company conference calls.

Further debt repayment may continue for an extended period of time; a settlement that would delay generic Lidoderm beyond 2014.
70
December 13, 2011
High Yield

On the surface, Endo presents a solid credit story with its stated 2013 leverage target of 22.5x. However, we think delevering is fully priced inbonds already trade 163 bp inside less-levered specialty pharma peer Warner Chilcott and 46 bp inside less-levered generic company Mylan on Z-spread (see Exhibit 79). In addition, we think operating disappointments related to the Opana TRF transition and the device segment could lead to a shift in cash priorities from debt pay down to acquisition. Management has stated that the pace of debt repayment will depend on the companys ability to do bolt-on or small deals. Opana is an oxymorphone tablet that competes with OxyContin and contributed 12% of pro forma (PF) LTM revenue. Endo received FDA approval for a tamper resistant formulation (TRF) of Opana in order to extend the franchise because existing Opana ER faces date-certain generic competition beginning September 2012. In the medical device segment, primarily the American Medical Systems (AMS) acquisition, which represents 20% of LTM pro forma sales, we see risk to managements growth targets. Historically, sales have been growing in the mid- to high single digits and management expects this trend to continue. However, we think this may be too high given recent weak medtech trends and the elective nature of many of AMSs products, which treat benign enlarged prostrate, incontinence, and erectile dysfunction, for example. Exhibit 79: ENDP trades rich to BB pharma peers
Elan ELN* IncomeStatementData EBITDA EBITDAMargin(%) BalanceSheetData Cash TotalDebt CashFlowData CashFlowfromOperations CapitalExpenditures FreeCashFlow Asa%ofTotalDebt CreditRatios LTMEBITDA/LTMInterest TotalDebt/LTMEBITDA Bond Rating Price YieldtoWorst ZSpread GSRating $175 16% $350 $626 $140 ($8) $132 21% 3.2x 3.6x 8.75%of2016 B2/BB $105.25 7.16% 622 IL
Endo ENDP* $1,037 36% $420 $3,735 $613 ($47) $566 15%
MylanInc. MYL $1,609 27% $513 $5,106 $621 ($265) $356 7%
ValeantPharma WarnerChilcott VRX* WCRX $1,585 48% $258 $6,535 $1,162 ($38) $1,124 17% 4.6x 4.1x 7%of2020 B1/BB $96.25 7.59% 571 OP $1,447 52% $316 $3,883 $1,234 ($56) $1,178 30% 5.8x 2.7x 7.75%of2018 B3/BB $99.25 7.89% 633 U
LTM9/30/2011
4.9x 4.6x 3.6x 3.2x 7%of2019 7.875%of2020 Ba3/BB Ba3/BB $104.50 $109.00 6.04% 6.04% 470 516 U OP
* Elan is pro forma for the divestment of EDT; Endo and Valeant are pro forma for recent acquisitions. Source: Company reports; Goldman Sachs Credit Research.
Company description
Endo was historically a pure-play specialty pharmaceutical company although it now operates across several healthcare subsectors with a portfolio of branded drugs, generic drugs, medical devices, capital equipment, and practice management services. The companys largest therapeutic area is pain, followed by urology. Endo sells 175 products, with Lidoderm contributing 28% of sales on an LTM PF basis and Opana contributing 12%. Generics are 18% of PF LTM revenue and medical devices are 27% of PF LTM revenue.
Benchmark Pricing
December 13, 2011
High Yield
Exhibit 80: Endo Pharmaceutical Financial model

($, millions)
Fiscal Year Ends December 31 ($ in Millions)
2010A 783 299 121 105 1,367 1,468 147 102 $1,716
2011E 799 383 112 150 1,500 1,645 568 207 313 $2,732
2012E 816 458 105 183 1,620 1,840 625 217 602 $3,284
2013E 833 449 100 137 1,576 1,853 687 228 638 $3,406
1QA 190 85 27 31 346 376 134 50 $560
2011 2QA 196 93 28 37 367 398 133 49 27 $608
3QA 207 98 28 36 384 426 148 54 132 $759
4QE 206 108 29 45 403 445 152 53 154 $805
2011E 799 383 112 150 1,500 $1,645 568 207 313 $2,732
LTM AMS PF Qualitest PF as reported 10/1/10-6/17/11 10/1-11/30/10 801 358 114 136 1,466 $1,595 481 204 158 $2,438 58 $390 390
PF LTM 801 358 114 136 1,466 $1,595 539 204 548 $2,885
Operating Data
Lidoderm Opana Percocet Voltaren Gel
Total pain franchise Total branded Generics Healthtronics AMS Total sales Income Statement Net Revenues % growth COGS excluding amortization % of Revenue SGA % of Revenue R&D % of Revenue Less Minority interest Plus Depreciation Plus Stock comp EBITDA EBITDA Margin % % growth Amortization of Intangibles Interest Expense Cash Flow Statement Cash Flow from Operations Capital Expenditures Free Cash Flow As a % of debt Balance Sheet Cash Bank Debt Senior Debt Subordinated Debt Other Debt Total Debt Ratios EBITDA/Interest EBITDA - Capex/Interest Secured Debt/LTM EBITDA Senior Debt/LTM EBITDA Total Debt/LTM EBITDA
$58
$1,716 17.5% $414 24.2% $531 30.9% $120 7.0% $28 $24 $23 $670 39.0% 22.8% 84 47
$2,732 59.2% $822 30.1% $795 29.1% $157 5.7% $55 $53 $42 $998 36.5% 49.0% 188 137
$3,284 20.2% $964 29.4% $947 28.8% $218 6.6% $56 $221 $0 $1,195 36.4% 19.7% 221 158
$3,406 3.7% $1,006 29.5% $928 27.2% $221 6.5% $56 $64 $32 $1,291 37.9% 8.0% 221 154
$560 53.7% $181 32.2% $156 27.8% $31 5.6% $13 $11 $7 $198 35.3% 39.7% 37 19
$608 53.2% $185 30.4% $177 29.2% $36 5.9% $13 $10 $11 $218 35.9% 37.0% 40 26
$759 70.9% $222 29.2% $229 30.1% $42 5.5% $16 $16 $15 $283 37.3% 68.9% 55 53
$805 57.5% $235 29.2% $233 29.0% $48 6.0% $13 $16 $8 $299 37.1% 48.4% 55 40
$2,732 59.2% $822 30.1% $795 29.1% $157 5.7% $55 $53 $42 $998 36.5% 49.0% 188 137
$2,438
390
$58
$2,885
$721 $704 $143 $54 $45 $40 $901
$65 $163 $38 $0 $7 $6 $136
$48 $9 $3 $0 $3 $0 $0
$835 28.9% $877 30.4% $184 6.4% $54 $54 $47 $1,037 35.9%
163 211
$454 (20) 434 36.6% $466 400 400 380 5 1,185
$628 (54) 574 15.4% $639 2,033 1,300 380 5 3,719
$693 (62) 631 17.4% $1,346 1,942 1,300 380 5 3,628
$759 (62) 697 0.0% $2,071 1,804 1,300 380 5 3,490
$131 (13) 118
$83 (11) 72
$204 (15) 190
$209 (16) 194
$628 (54) 574 15% $639 2,033 1,300 380 5 3,719
$613 (47) 566 15% $420 2,049 1,300 380 5 3,735
$565 395 400 380 6 1,180
$622 2,200 1,300 626 6 4,132
$420 2,049 1,300 380 5 3,735
$639 2,033 1,300 380 5 3,719
14.4x 14.0x 0.6x 1.2x 1.8x
7.3x 6.9x 2.0x 3.3x 3.7x
7.6x 7.2x 1.6x 2.7x 3.0x
8.4x 8.0x 1.4x 2.4x 2.7x
10.5x 9.9x 0.5x 1.1x 1.6x
8.5x 8.1x 2.8x 4.5x 5.3x
5.4x 5.1x 2.3x 3.7x 4.1x
7.5x 7.1x 2.0x 3.3x 3.7x
7.3x 6.9x 2.0x 3.3x 3.7x
4.9x 4.7x 2.0x 3.2x 3.6x
Source: Company data, Goldman Sachs Credit Research.
72
December 13, 2011
High Yield
Homebuilders: Coverage view and recommendations

Kristen McDuffy Goldman, Sachs & Co. kristen.mcduffy@gs.com 1-212-357-6157 Adam Goodwin Goldman, Sachs & Co. adam.goodwin@gs.com 1-212-902-0459 We maintain a Neutral coverage view of the homebuilding space as we believe that current spread levels appropriately compensate investors for owning homebuilder credit risk at this point in the cycle. The weighted average yield for on-the-run high yield homebuilder bonds (excluding Hovnanian) is 8.7%, which is roughly on top of the 8.6% yield on the overall high yield market. In our view, the risk of a significant deterioration in the housing market in 2012 is low because conditions have already been at or near trough levels for several years. At the same time, we expect limited recovery in housing fundamentals in 2012 owing to anemic demand for new homes and a significant supply overhang. Still, we believe that operating performance for most builders will actually demonstrate modest year-over-year improvement in 2012, reflecting recent efforts among management teams to drive profitability regardless of broader market conditions. Moreover, in our view, most builders have ample runway to endure several more years of an anemic housing environment given relatively strong balance sheets, minimal near-term debt maturities, and no significant covenant-compliance concerns. Accordingly, we could become more constructive on the sector if it began to trade wide to the overall high yield index as we believe that there is generally less downside risk to earnings performance and lower near-term probability of default for the homebuilders relative to other sectors. In our view, the outlook for the housing market remains challenging over the near term given a dearth of positive catalysts that could potentially buoy the new home market. Unemployment and consumer confidence have improved so far in 2011 but remain at historically weak levels and are expected to show minimal improvement in 2012. Moreover, additional government support for the housing market through tax credits or other means continues to seem unlikely. At the same time, the supply side of the equation remains decidedly negative: though the supply of new homes available for sale is at historical lows, a significant shadow inventory of delinquencies, foreclosures, and REOs continues to weigh on the market. We think these factors point to a range-bound backdrop for the builders in 2012. Nevertheless, in our view, results for most builders should improve slightly in 2012, driven by modest growth in home closings, gross margin expansion, and benefits from recent cost-reduction initiatives. We believe that deliveries will be higher in 2012 compared to 2011 across the sector given fairly robust backlogs going into the new year. Additionally, many builders have guided to higher community counts in 2012, which should benefit deliveries. We expect gross margins will also be slightly higher for most builders as increased deliveries improve operating leverage. While the homebuilders will have fewer cost-reduction levers (e.g., reducing construction costs) in 2012 than they did in 2011, the full-year benefit of cost-reduction initiatives completed during 2011 should benefit gross margins. Moreover, an increasing proportion of sales from new communities should also bolster gross margins as most builders suggest that newer lots garner higher margins compared to legacy lots. Finally, we expect recent efforts to trim overhead costs across the sector to improve SG&A/sales ratios and support overall profitability among the builders. Although we anticipate that most homebuilders will continue to invest in land and land development, we believe that the rate of spending might decline in 2012 compared to 2011 given a more cautious stance among management teams and fewer distressed opportunities in desirable markets.
73
December 13, 2011
High Yield
Beazer: Distressed trading levels, low expectations create upside

GS Company Beazer Beazer Rating OP OP Size (MM) 250 250 Coupon 9.125% 12.000% Maturity 05/15/19 10/15/17 Rating Caa3/CCC B2/B Bid Px 68.00 104.00 YTW 16.83% 10.93% OAS 1552 994 CDS Levels Beazer 5-Year (pts) 25.25 / 26.75

In our view, at current trading levels Beazers 12% senior secured notes of 2017 ($104, 10.9% YTW, 994 bp OAS) and its 9.125% senior unsecured notes of 2019 ($68, 16.8% YTW, 1,552bp OAS) represent the most compelling long opportunity in the homebuilding sector. We believe that Beazer is somewhat misunderstood by the market and is often unjustifiably thrown into the same category as other more highly distressed credits. However, we think Beazer is not a near-term bankruptcy candidate and should be able to weather several more years of a protracted housing downturn. In fact, given the significant growth in Beazers backlog over the past several periodsup nearly 90% on a year-over-year basis at the end of 4QFY11we think the company is positioned for a strong start to FY2012. We continue to be comfortable with Beazer credit risk for a number of key reasons, including the following: 1. Beazer has ample liquidity and no significant near-term debt maturities: The company had approximately $370 million of unrestricted cash on hand as of 4QFY11, and it has the ability to raise more than $400 million of additional cash through secured debt issuance (should the credit markets permit). Beazer faces no significant debt maturities until 2015, and even then, its maturity schedule is fairly manageable and well staggered. Beazer has a relatively long lot supply: The company has nearly seven years of owned lots, roughly five of which are finished or partially developed. Beazer does not have a top-heavy capital structure, which provides refinancing flexibility and a potential source of liquidity (i.e., through secured debt issuance). We have confidence in Beazers new management team: in our view, management has outlined a compelling plan to enable Beazers return to profitability and ensure its ultimate survival. In our view, the minimum tangible net worth covenant in the bond indentures for Beazers 2015 and 2016 bonds does not pose a significant risk to the BZH credit story: Even if this covenant were triggered, it would only result in Beazer having to repurchase $62.5 million of the bonds, potentially below par in the open market.
2.
3.
4.
5.
Given the relatively distressed trading levels for Beazers bonds, particularly the unsecured notes, we believe that the entire complex could rally significantly in 2012 if the company demonstrates continued progress toward reducing cash burn and reaching sustained profitability. In our view, Street expectations for Beazer are already quite low, which we think skews the risk associated with owning the companys bonds to the upside entering 2012. However, the key risk to the downside is that performance is, in fact, worse than expected, which would likely cause Beazer bonds to underperform.
74
December 13, 2011
High Yield

Beazer reported 4QFY11 homebuilding adjusted EBITDA of $9 million (excluding inventory impairments, interest amortized to cost of homes sold, and restructuring charges) compared to negative $5 million in 3QFY11 and $1 million in the prior-year period. Net new home orders increased 33% year over year to 1,006 units, and the companys quarter-end backlog improved 88% over 4QFY10 to 1,450 units. Beazers unrestricted cash balance increased to $370 million from $275 million at the end of 3QFY11. Notably, due to new mortgage underwriting audit processes implemented by the companys largest mortgage provider, over 100 home closings were pushed from the last week of September into October; these closings generated roughly $23 million of additional cash during the first two weeks of October. We believe that Beazer is poised to demonstrate continued operational improvement in FY2012 driven by modestly increased home closings, gross margin improvement, and benefits from recent cost-reduction actions. In our view, Beazers relatively robust backlog entering FY2012 positions the company for a strong start to the year. We anticipate some improvement in sales per community as Beazers new management team continues to focus on the 4 psproduct, people, promotion, and pricingin its sales force. At the same time, overall volumes should benefit from modest growth in the companys community count. In addition, an increasing percentage of home sales from new communities should bolster Beazers gross margins (recall that margins on new communities are generally above those for legacy communities). Moreover, we think margins should also benefit from managements new incentive compensation plan: In 4QFY11, the company adopted an entirely new approach to incentive compensation for its divisions that incorporates both monthly sales velocity and contribution margins. Hence, managers will be compensated for actual EBIT creation rather than for simply driving sales volume or maximizing gross margins, ensuring that each division focuses on maintaining a careful balance between both drivers of performance. Accordingly, we expect Beazers homebuilding adjusted EBITDA to improve to approximately $25 million in FY2012 from negative $43 million in FY2011. Based on this estimate, as well as our expectation that Beazers land development expenditures will roughly match its land usage (i.e., cash use from inventory component of working capital will be negligible), we expect Beazers rate of cash burn to decline in FY2012. With this in mind, we forecast that Beazer will end the year with a relatively comfortable $250 million of unrestricted cash on hand.
Company description
Beazer is a geographically diversified homebuilder with active operations across 16 different states. In 2011 the company also launched a small pre-owned homes division in which it acquires, improves, and rents out recently built and previously owned homes largely distressed sales, foreclosures, or short sales, which it can acquire at a discount to replacement cost. Beazer is moderate in size relative to other builders, with 3,249 homes closed in FY2011. This compares to the largest builders (Horton and Pulte), which both closed over 15,000 units in the last 12 months, and the smallest builders (Standard Pacific and Toll), which closed under 2,700 homes in the last 12 months. The company has relatively balanced regional exposure, with 39% of its units in backlog located in the West, 44% in the East, and 17% in the Southeast.
75
December 13, 2011
High Yield
Exhibit 82: Beazer Financial model

($, millions)
Restated 9/30/2008 FY:08 Income Statement Home closing revenue Land closing revenue Homebuilding Revenues Financial services revenue Total Revenues Cost of home closings Cost of land closings Financial Services costs Inventory impairments(1) Total Cost of Sales Homebuilding SG&A Financial Services SG&A Severance & Other Non-Recurring Costs Total SG&A EBITDA Total Impairments Amortized Interest Homebuilding Adjusted EBITDA Total Adjusted EBITDA D&A Interest Incurred Income from unconsolidated entities Loss on extinguishment of debt Other income Income tax benefit Discontinued operations Net Earnings (84.6) (71.7) (151.1) (951.9) 53.6 8.4 (13.9) (189.4) 1,693.6 115.7 1,809.3 4.2 1,813.5 (1,941.3) (106.2) (406.2) (2,047.4) (303.7) (2.5) (3.1) (309.3) (543.2) 406.2 112.3 (23.4) (24.8) (24.7) 139.7 (76.6) 968.3 3.4 971.7 971.7 (858.0) (2.8) (95.2) (955.9) (218.2) (4.5) (222.7) (206.9) 95.2 54.7 (52.5) (57.0) (18.4) 133.5 (12.1) 264.8 4.0 268.7 268.7 (235.9) (2.6) (26.3) (264.7) (43.5) (43.5) (39.5) 26.5 14.3 1.4 1.4 (3.4) 30.3 0.0 (15.6) 1.4 (2.4) (59.5) 981.8 9.3 991.2 991.2 (852.7) (5.2) (49.6) (907.5) (184.4) (184.4) (100.8) 50.0 52.2 1.5 1.5 (12.7) 127.3 (8.8) 43.9 (69.6) 118.4 (4.5) (34.0) 110.0 0.3 110.3 110.3 (98.2) (0.0) (0.7) (98.9) (37.8) (37.8) (26.4) 0.7 6.9 (18.8) (18.8) (1.9) 32.4 0.2 (2.9) (18.1) 0.6 (0.3) (48.8) 123.6 3.9 127.5 127.5 (108.3) (2.5) (17.9) (128.7) (37.6) (4.0) (41.7) (42.9) 17.9 8.3 (12.7) (12.7) (2.1) 32.9 0.1 (0.1) (11.5) 2.4 0.3 (53.8) 168.4 4.4 172.8 172.8 (149.7) (2.4) (6.9) (159.0) (37.3) (9.1) (46.4) (32.6) 6.9 11.2 (5.4) (5.4) (2.7) 32.9 0.1 0.1 (17.1) (3.6) (3.4) (59.1) 313.8 21.1 334.9 334.9 (282.8) (20.6) (7.1) (310.6) (42.3) (2.6) (44.9) (20.5) 7.1 20.0 9.2 9.2 (3.6) 32.6 0.2 (15.6) (2.8) (0.8) (43.2) 712.7 29.7 742.4 742.4 (636.3) (25.6) (32.7) (694.6) (170.1) (15.7) (185.8) (138.0) 32.5 46.4 (43.3) (43.3) (10.3) 130.8 0.6 (2.9) (62.2) (4.2) (204.9) 214.0 2.0 216.0 216.0 (189.5) (1.5) (191.0) (38.5) (38.5) (13.6) 13.0 (0.6) (0.6) (2.5) 32.6 (15.0) 27.0 (4.1) 176.1 2.0 178.1 178.1 (155.4) (1.5) (156.9) (34.3) (34.3) (13.1) 11.0 (2.1) (2.1) (2.5) 32.6 (15.0) (30.6) 237.2 2.0 239.2 239.2 (208.3) (1.5) (209.8) (37.9) (37.9) (8.6) 15.0 6.4 6.4 (2.5) 32.6 (15.0) (26.1) 341.2 2.0 343.2 343.2 (290.7) (1.5) (292.2) (46.1) (46.1) 5.0 16.0 21.0 21.0 (2.5) 32.6 (15.0) (12.5) 968.5 8.0 976.5 976.5 (844.0) (6.0) (850.0) (156.9) (156.9) (30.3) 55.0 24.7 24.7 (10.0) 130.6 (60.0) 27.0 (73.3) 9/30/2009 FY:09 Restated 9/30/2010 4Q:10 Restated 9/30/2010 12/31/2010 FY:10 1Q:11 3/31/2011 2Q:11 6/30/2011 3Q:11 9/30/2011 4Q:11 9/30/2011 12/31/2011 FY:11 1Q:12E 3/31/2012 2Q:12E 6/30/2012 3Q:12E 9/30/2012 4Q:12E 9/30/2012 FY:12E
(1) Inventory impairments were included in COGS sub-segments prior to 4Q10 Cash Flow Items Total Adjusted EBITDA Distributions from equity affiliates EBITDA + Distributions Interest Expense Cash Taxes Funds from Operations Change in Working Capital Cash from Operations Capital Expenditures Dividends Free Cash Flow Investments in joint ventures Debt Raised (Repaid) Stock issuance Decrease (increase) in restricted cash Other Cash Inflows (Outflows) Change in Cash (24.8) 7.2 (17.6) (139.7) 188.8 31.5 316.0 347.5 (10.6) 336.9 (13.8) (143.6) (0.1) 4.9 (54.3) 130.0 (57.0) 5.2 (51.9) (133.5) 21.0 (164.3) 246.2 81.9 (7.0) 74.9 (25.5) (81.6) (0.0) (49.2) 4.5 (77.0) 1.4 0.5 1.8 (30.3) 5.2 (23.3) 89.2 65.8 (4.2) 61.6 (0.5) (58.9) (0.0) 3.4 59.5 65.2 1.5 15.8 17.2 (127.3) 118.1 8.0 48.9 56.9 (10.8) 46.1 (5.6) (245.4) 166.6 10.3 57.8 29.8 (18.8) 0.2 (18.6) (32.4) 0.7 (50.3) (97.5) (147.9) (2.4) (150.3) (1.1) 93.3 (0.1) (31.4) 4.2 (85.4) (12.7) 0.2 (12.6) (32.9) 2.3 (43.2) (24.1) (67.3) (2.6) (69.9) (0.3) (14.5) (0.4) 15.6 (69.5) (5.4) 0.2 (5.3) (32.9) (3.7) (41.8) (42.7) (84.6) (7.1) (91.7) (0.3) 201.2 (0.1) (213.3) (3.4) (107.6) 9.2 0.4 9.6 (32.6) 2.4 (20.6) 123.5 102.9 (8.4) 94.5 (0.2) (1.6) (0.0) 7.3 (4.1) 95.8 (27.8) 1.0 (26.8) (130.8) 1.7 (156.0) (40.9) (196.9) (20.5) (217.4) (1.9) 278.4 (0.2) (237.9) 12.2 (166.7) (0.6) (0.6) (32.6) (33.2) (75.0) (108.2) (2.5) (110.7) (110.7) (2.1) (2.1) (32.6) (34.8) (25.0) (59.8) (2.5) (62.3) (62.3) 6.4 6.4 (32.6) (26.2) 20.0 (6.2) (2.5) (8.7) (8.7) 21.0 21.0 (32.6) (11.7) 75.0 63.3 (2.5) 60.8 60.8 24.7 24.7 (130.6) (105.9) (5.0) (110.9) (10.0) (120.9) (120.9)
76
December 13, 2011
High Yield
Exhibit 83: Beazer Financial model

($, millions)
Restated 9/30/2008 FY:08 Balance Sheet Items Cash and Cash Equivalents Restricted Cash Total Cash and Cash Equivalents Inventories: Owned Inventory Consolidated inventory not owned Total Inventories Total Assets Homebuilding Debt Balance Sheet Homebuilding Debt Joint Venture Recourse Debt & Guarantees Total Homebuilding Debt Model home financing obligations Total Debt Outstanding Shareholder's Equity Common shares out (millions) - diluted Share Price Market Capitalization Enterprise Value Operating and Financial Statistics: Operating Performance Measures Homebuilding Revenue Growth Homebuilding Gross Margin (1) SG&A / Homebuilding Revenue Homebuilding Adjusted EBITDA Margin Total Adjusted EBITDA Margin Inventory Impairments / Prior Inventory FFO / Revenue FCF / Revenue Key Coverage Measures Homebuilding Adjusted EBITDA / Interest Incurred Total Adjusted EBITDA / Interest Incurred FFO / Homebuilding Debt (3) FCF / Homebuilding Debt (3) Inventories / Homebuilding Debt (2) (3) Inventories / Net Homebuilding Debt (2) (3) Inventories / Total Debt (3) Inventories / Net Total Debt (2) (3) Key Leverage Measures Homebuilding Debt / Capitalization (3) Net Homebuilding Debt / Capitalization (3) Total Debt / Capitalization (3) Net Debt / Capitalization (3) Homebuilding Debt / Homebuilding Adj EBITDA (3) Net Homebuilding Debt / Homebuilding Adj EBITDA (3) 82.1% 75.2% 82.7% 76.3% NM NM 88.4% 83.4% 88.6% 83.9% NM NM 75.6% 63.5% 75.6% 63.5% 988.2x 555.7x 75.6% 63.5% 75.6% 63.5% 824.3x 463.6x 78.7% 70.6% 78.7% 70.6% NM NM 81.1% 75.0% 81.1% 75.0% NM NM 83.9% 80.3% 83.9% 80.3% NM NM 86.4% 81.8% 86.4% 81.8% NM NM 86.4% 81.8% 86.4% 81.8% NM NM 86.6% 83.7% 86.6% 83.7% NM NM 88.5% 86.6% 88.5% 86.6% 1167.1x 1213.4x 90.2% 88.6% 90.2% 88.6% 97.3x 82.8x 91.0% 89.0% 91.0% 89.0% 51.0x 40.9x 91.0% 89.0% 91.0% 89.0% 51.0x 40.9x NM NM 1.8% 19.6% 0.9x 1.4x 0.9x 1.3x NM NM -11.0% 5.0% 0.8x 1.3x 0.8x 1.2x 0.0x 0.0x 0.6% 3.7% 0.9x 1.7x 0.9x 1.7x 0.0x 0.0x 0.7% 3.8% 0.9x 1.7x 0.9x 1.7x NM NM -7.7% -2.7% 0.9x 1.4x 0.9x 1.4x NM NM -8.9% -14.0% 1.0x 1.4x 1.0x 1.4x NM NM -12.6% -19.9% 1.0x 1.3x 1.0x 1.3x NM NM -12.4% -17.3% 0.9x 1.3x 0.9x 1.3x NM NM -12.4% -17.3% 0.9x 1.3x 0.9x 1.3x NM NM -21.8% -38.9% NA NA NA NA 0.0x 0.0x -10.4% -13.5% NA NA NA NA 0.1x 0.1x -9.1% -6.9% NA NA NA NA 0.2x 0.2x -8.4% -9.6% NA NA NA NA 0.2x 0.2x -8.4% -9.6% NA NA NA NA -40.3% 9.3% 17.1% -1.3% -1.4% 14.6% 1.7% 18.6% -46.3% 25.3% 22.9% -5.4% -5.9% 5.8% -16.9% 7.7% -26.5% 16.3% 16.2% 0.5% 0.5% 2.0% -8.7% 22.9% 2.0% 18.5% 18.6% 0.2% 0.2% 4.2% 0.8% 4.6% -48.2% 17.0% 34.3% -17.1% -17.1% 0.1% -45.6% -136.2% -33.7% 19.0% 32.7% -10.0% -10.0% 1.4% -33.9% -54.8% -46.3% 17.8% 26.9% -3.1% -3.1% 0.5% -24.2% -53.1% 24.6% 16.3% 13.4% 2.8% 2.8% 0.5% -6.2% 28.2% -25.1% 17.2% 23.9% -5.8% -5.8% 2.7% -21.0% -29.3% 95.8% 17.5% 18.0% -0.3% -0.3% NA -15.4% -51.3% 39.7% 18.0% 19.5% -1.2% -1.2% NA -19.5% -35.0% 38.4% 18.5% 16.0% 2.7% 2.7% NA -11.0% -3.6% 2.5% 19.5% 13.5% 6.1% 6.1% NA -3.4% 17.7% 31.5% 18.5% 16.2% 2.5% 2.5% NA -10.8% -12.4% 1,676.1 45.0 1,721.2 71.2 1,792.4 374.9 39.3 6.0 234.8 1,442.6 1,478.5 19.6 1,498.2 30.4 1,528.5 196.6 39.8 5.6 222.4 1,194.1 1,211.5 15.8 1,227.3 1,227.3 397.1 75.7 4.1 312.5 963.6 1,211.5 15.8 1,227.3 1,227.3 397.1 75.7 4.1 312.5 963.6 1,306.3 15.8 1,322.1 1,322.1 349.6 73.9 5.5 402.6 1,202.4 1,286.7 17.9 1,304.6 1,304.6 295.9 73.9 4.6 337.9 1,189.2 1,489.0 17.9 1,506.9 1,506.9 241.0 74.0 1.9 143.5 1,091.4 1,488.8 17.9 1,506.7 1,506.7 198.4 74.1 2.2 163.1 1,022.4 1,488.8 17.9 1,506.7 1,506.7 198.4 74.1 2.2 163.1 1,022.4 1,488.8 17.9 1,506.7 1,506.7 194.3 74.1 2.2 163.1 1,133.1 1,488.8 17.9 1,506.7 1,506.7 163.7 74.1 2.2 163.1 1,195.4 1,488.8 17.9 1,506.7 1,506.7 137.6 74.1 2.2 163.1 1,204.1 1,488.8 17.9 1,506.7 1,506.7 125.1 74.1 2.2 163.1 1,143.3 1,488.8 17.9 1,506.7 1,506.7 125.1 74.1 2.2 163.1 1,143.3 584.3 0.3 584.6 507.3 49.5 556.8 537.1 39.2 576.3 537.1 39.2 576.3 451.7 70.6 522.4 382.2 71.0 453.2 274.6 284.3 559.0 370.4 277.1 647.5 370.4 277.1 647.5 259.7 277.1 536.7 197.4 277.1 474.5 188.7 277.1 465.7 249.5 277.1 526.6 249.5 277.1 526.6 9/30/2009 FY:09 Restated 9/30/2010 4Q:10 Restated 9/30/2010 12/31/2010 FY:10 1Q:11 3/31/2011 2Q:11 6/30/2011 3Q:11 9/30/2011 4Q:11 9/30/2011 12/31/2011 FY:11 1Q:12E 3/31/2012 2Q:12E 6/30/2012 3Q:12E 9/30/2012 4Q:12E 9/30/2012 FY:12E
1,545.0 106.7 1,651.7 2,641.8
1,265.4 53.0 1,318.5 2,029.4
1,153.7 50.0 1,203.7 1,902.9
1,153.7 50.0 1,203.7 1,902.9
1,207.9 37.9 1,245.8 1,901.4
1,233.4 35.5 1,268.9 1,853.4
1,290.8 22.6 1,313.4 2,002.2
1,192.4 11.8 1,204.1 1,977.5
1,192.4 11.8 1,204.1 1,977.5
NA NA NA NA
NA NA NA NA
NA NA NA NA
NA NA NA NA
NA NA NA NA
(1) Excludes non-cash impairment charges and interest expense amortized in cost of sales (2) Inventories do not include consolidated inventory not owned (3) Debt balance used in these metrics does not include cash-secured delayed draw term facility
77
December 13, 2011
High Yield
KB Home: Five-year CDS trades too tight relative to Beazer

GS Company KB Home Rating U Size (MM) 300 Coupon 7.250% Maturity 06/15/18 Rating B2/B+ Bid Px 89.50 YTW 9.44% OAS 824 CDS Levels KB Home 5-Year (pts) 9 / 10

We expect KB Homes bonds and CDS to underperform in 2012 given that the credit trades tight to similarly capitalized builders, despite the companys relatively anemic operating performance and the risks associated with a deteriorating liquidity position. We recommend that investors swap out of the KB Home 7.25% senior unsecured notes of 2018 ($89.5, 9.4% YTW, 824 bp OAS) into the Beazer 9.125% senior unsecured notes of 2019 ($68, 16.8% YTW, 1,552bp OAS). This trade would allow investors to take nearly 22 points off the table and pick up almost 750 basis points of incremental yield for what we believe is only a modest step down in credit quality. In addition, we recommend that investors combine a long position in Beazer five-year CDS with a short position in KB Home five-year CDS. As illustrated in Exhibit 85, Beazer has historically traded 100-200 bp wide of KB Home. However, more recently, this relationship has widened sharply, with the current spread differential now at roughly 600 bp. Exhibit 85: We think gap between BZH and KBH should compress to at least 200 bp context
2,100 1,900 1,700 1,500 1,300 1,100 900 700 500 300
Basis Points
KBH 5-YR CDS

Source: Bloomberg, Goldman Sachs Credit Research.
BZH 5-YR CDS
In our view, investors should use the recent widening of this relationshipwell outside of its normal historical contextto establish a long position in Beazer and short position in KB Home. This trade offers significant positive carry as investors would be able to take in over
December 13, 2011
High Yield
14 points upon its initiation (based on the 25 point bid price for Beazer and the 10.75 point ask price for KB Home) and would be relatively market neutral, which we believe is attractive given recent volatility. As we review the notable events and announcements for each builder throughout 2011, we believe that the deterioration in KB Homes credit profile has actually been more severe versus Beazer, primarily due to the issues surrounding the South Edge loan guarantee. In our view, KB Home is only a modestly superior credit relative to Beazer, given similarly anemic operating performance, nearly identical credit metrics, and similar liquidity profiles. Hence, we think the spread differential between KB Home five-year CDS and Beazer fiveyear CDS should compress to at least 200 bpmore in line with the recent historical context. We believe there are a number of key catalysts to this trade, which include the following:
Weaker than expected results from KB HomeWe believe that management

has set the bar high for 2012; however, we think that KB Home has historically over-promised and under-delivered, so worse than expected results could cause KBH CDS to trade wider.
Better than anticipated performance from BeazerUnlike KB Home, we believe

that the Street is not expecting as much from Beazer. In our view, the name continues to suffer from legacy investor biases reflecting prior financial issues. As a result, faster than expected progress toward reducing cash burn and reaching sustained profitability could cause BZH to tighten.
Asset-backed revolver or secured bond issuance at KB HomeGiven the

current liquidity situation at KB Home and the companys desire to remain active in the land market, we believe that management might consider accessing the capital markets to raise cash at some point in FY2012. Because its market capitalization has been significantly diminished and unsecured bond issuance would be prohibitively expensive based on current trading levels for its bonds, we believe that KB Home would most likely choose to put into place an assetbacked revolving credit facility or issue a secured bond. Though this would address the companys near-term liquidity issues, any secured debt issuance would effectively layer KB Homes existing unsecured bonds. In our view, this would diminish recovery for bondholders and modestly increase leverage, raising the long-term probability of default. Thus, we believe this would cause the KBH CDS curve to steepen, with five-year CDS potentially widening from current trading levels.

In our view, the key risk associated with being short KB Home is that the company could opt to issue equity or a convertible bonds, which would address liquidity concerns without layering unsecured bondholders.

KB Home reported 3QFY11 homebuilding adjusted EBITDA of $10 million (excluding a $7.4 million benefit from favorable warranty adjustments and an $8 million insurance recovery), below our estimate of $18 million, primarily attributable to lower than expected revenues and gross margins. Total revenues declined 27% year over year to $367 million, reflecting a 31% decrease in home deliveries to 1,603 homes, partially offset by a 6% increase in the average closing price to $227,400. Net new orders (excluding joint ventures) improved 40% year over year to 1,838 units, reflecting a 10% increase in community count to 233
79
December 13, 2011
High Yield
communities as well as easy comparisons against 3QFY10 due to the timing of the expiration of the federal homebuyer tax credit last year. KB Homes quarter-end backlog increased 23% in both dollars and units to $559 million and 2,657 homes, respectively. Looking forward, we expect KB Home to demonstrate modest improvement in home closings for FY2012, primarily driven by increases in its community count. In addition, the companys gross margins should expand modestly due to increased deliveries from higher margin new communities. As we have heard from other builders, KB Home has suggested that sales from its new communities typically garner 200 to 300 basis points of gross margin improvement compared to legacy communities. Nevertheless, we believe that the companys overall liquidity could become relatively tight in 1H2012 given our expectation of a diminished cash balance at year-end 2011 and some working capital draw in early 2012. Recall that pursuant to a plan of reorganization for its South Edge joint venture, KB Home has agreed to pay lenders $214-225 million (with a net obligation of $216-240 million including various fees, expenses, and other charges). The company anticipates that this payment will be made in 4QFY11 or early 1QFY12. Taking into account this use of cash, KB Home expects to end FY2011 with roughly $500 million of total cash, implying an unrestricted cash balance of $408 million (assuming that restricted cash related to letters of credit and surety bonds remains constant at around $92 million). Accordingly, we believe that the company may look to access the capital markets at some point over the next several quarters.
Company description
KB Home is the fourth largest homebuilder in the United States based on LTM closings and revenues. The company began operating in 1957 through various subsidiaries of Kaufman and Broad, Inc. In 1986, Kaufman and Broad transferred all of its homebuilding and mortgage banking operations to the company, which subsequently completed an IPO under the name Kaufman and Broad Home Corporation. The business was spun off from Kaufman and Broad, Inc. in 1989, becoming an independent company operating predominantly in California and France. In 2001 the company changed its name to KB Home. Over the next several years KB significantly expanded its presence throughout the United States, and in 2007 it divested its French operations; today the company operates in 10 states (CA, AZ, NV, CO, TX, FL, MD, NC, SC, VA) and 30 major markets.
80
December 13, 2011
High Yield
Exhibit 86: KB Home Financial model

($, millions)
11/30/2007 11/30/2008 11/30/2009 11/30/2010 11/30/2010 2/28/2011 5/31/2011 8/31/2011 11/30/2011 FY:07 FY:08 FY:09 4Q:10 FY:10 1Q:11 2Q:11 3Q:11 4Q:11E Income Statement Revenues: Housing Land Homebuilding Revenues Financial Services Total Revenues Cost of Sales: Cost of Homes Sold Cost of Land Sold Homebuilding Cost of Sales Financial Services Cost of Sales Homebuilding SG&A EBITDA Total Impairments Interest amortized Homebuilding Adjusted EBITDA Total Adjusted EBITDA Total D&A Income Statement Interest Interest Incurred Equity in loss of unconsildated joint ventures Other Income Income Taxes Net Earnings EPS from continuing operations (diluted) Cash Flow Items Total Adjusted EBITDA Distributions from joint ventures Interest Expense Cash Taxes Funds from Operations Change in Working Capital Amt spent on land Cash from Operations Capital Expenditures Dividends Paid Free Cash Flow Investments in unconsolidated joint ventures Asset sales (purchases) Change in restricted cash Debt Raised (repaid) Issuances of stock Other Cash Inflows (outflows) Change in Cash LTM FY:11E 2/28/2012 5/31/2012 8/31/2012 11/30/2012 1Q:12E 2Q:12E 3Q:12E 4Q:12E FY:12E
6,211.6 189.0 6,400.6 15.9 6,416.5
2,940.2 82.9 3,023.2 10.8 3,033.9
1,758.2 58.3 1,816.4 8.4 1,824.9
446.0 1.9 447.9 3.0 451.0
1,575.5 6.3 1,581.8 8.2 1,590.0
195.2 0.1 195.3 1.6 196.9
270.0 270.0 1.8 271.7
364.5 0.1 364.5 2.8 367.3
474.6 474.6 2.0 476.6
1,275.7 2.1 1,277.7 9.2 1,287.0
1,304.3 0.2 1,304.5 8.2 1,312.6
266.3 266.3 2.0 268.3
324.1 324.1 2.0 326.1
452.7 452.7 2.0 454.7
489.6 489.6 2.0 491.6
1,532.6 1,532.6 8.0 1,540.6
(6,563.1) (3,149.1) (1,643.8) (263.3) (165.7) (106.2) (6,826.4) (3,314.8) (1,749.9) (4.8) (824.6) (1,222.0) 1,179.2 171.5 117.6 128.7 (17.3) (13.0) 199.6 (129.2) (79.3) 46.0 (1,414.8) (4.5) (501.0) (777.1) 606.8 129.9 (46.7) (40.4) (9.3) (13.0) 156.4 (135.2) (33.4) (8.2) (976.1) (3.3) (303.0) (226.1) 157.6 138.2 64.5 69.7 (5.2) (51.8) 119.6 (35.6) 7.5 209.4 (101.8)
(360.8) (1,301.7) (2.3) (6.6) (363.1) (1,308.3) (0.5) (55.7) 32.9 2.8 25.7 58.8 61.4 (1.2) (16.2) 30.3 (0.5) 0.5 2.0 17.4 (3.1) (289.5) (6.6) 19.6 105.2 113.1 118.2 (4.4) (68.3) 122.2 0.8 2.1 7.0 (69.4)
(170.7) (0.1) (170.8) (0.9) (49.6) (23.2) 1.7 11.4 (10.8) (10.1) (1.1) (11.4) 29.5 (56.0) (22.4) (0.4) (114.5)
(250.4) (250.4) (0.8) (62.5) (40.8) 20.6 19.6 (1.6) (0.7) (1.1) (13.1) 30.0 0.6 (14.3) 0.3 (68.5)
(302.8) (0.1) (302.9) (0.8) (60.2) 4.4 1.2 21.7 25.4 27.3 (1.0) (12.3) 29.1 (0.8) 0.1 (9.6)
(388.7) (1,084.7) (1,112.6) (2.5) (0.2) (388.7) (1,087.2) (1,112.8) (1.0) (66.5) 21.5 28.0 48.5 49.5 (1.0) (12.0) 28.0 (1.0) 7.5 (3.1) (228.0) (26.7) 26.3 78.4 71.8 78.0 (4.5) (53.1) 119.0 (56.7) (36.1) 1.9 (175.2) (3.5) (238.8) (38.1) 23.5 80.7 61.4 66.1 (4.3) (48.9) 116.6 (57.2) (36.6) (0.1) (185.2)
(215.4) (215.4) (1.0) (62.6) (9.7) 13.0 2.3 3.3 (1.0) (12.0) 28.0 (1.0) (23.7)
(268.3) (268.3) (1.0) (68.1) (10.3) 22.0 10.7 11.7 (1.0) (12.0) 28.0 (1.0) (24.3)
(369.7) (369.7) (1.0) (74.7) 10.3 27.0 36.3 37.3 (1.0) (12.0) 28.0 (1.0) (3.7)
(398.6) (1,252.0) (398.6) (1,252.0) (1.0) (68.5) 24.4 29.0 52.4 53.4 (1.0) (12.0) 28.0 (1.0) 10.4 (4.0) (273.9) 14.8 91.0 101.8 105.8 (4.0) (48.0) 112.0 (4.0) (41.2)
128.7 42.4 (199.6) 254.3 225.9 367.8 593.7 0.7 (77.2) 517.2 (85.2) 739.8 (773.1) 5.4 135.4 539.6
(40.4) 22.2 (156.4) 213.1 38.5 202.5 241.0 7.1 (63.0) 185.1 (59.6) (115.4) (318.6) 6.0 100.3 (202.2)
69.7 7.7 (119.6) 209.4 167.2 216.1 383.3 (1.4) (19.1) 362.8 (19.9) 1.1 (276.6) 2.5 (33.4) 36.4
61.4 10.4 (30.3) 2.0 43.5 (3.6) 39.9 0.2 (4.8) 35.3 (14.1) 0.9 (27.8) 0.2 (9.7) (15.2)
118.2 20.4 (122.2) 7.0 23.3 (117.2) 560.0 (93.9) (0.4) (19.2) (113.5) (15.7) (1.2) (101.2) 1.5 (39.5) (269.5)
(10.1) 0.2 (29.5) (39.4) (115.8) 140.0 (155.2) (0.1) (4.8) (160.1) (0.6) 80.6 (5.7) (70.5) 0.1 (9.7) (165.9)
(0.7) 6.1 (30.0) (24.5) (81.5) (106.1) (0.0) (4.8) (110.9) (1.3) 7.2 (10.3) 0.4 (0.4) (115.3)
27.3 (0.0) (29.1) (1.8) (38.3) (40.1) 0.0 (4.8) (44.9) (0.1) 0.8 (105.2) 1.0 1.5 (146.9)
49.5 2.5 (28.0) 24.0 118.1 142.1 (0.2) (4.8) 137.1 (21.4) (205.0) (89.3)
78.0 16.7 (119.0) 2.0 (22.2) (239.3) NA (261.5) 0.1 (19.2) (280.6) (16.1) 80.6 3.2 (213.8) 1.7 (18.2) (443.3)
66.1 8.8 (116.6) (41.7) (117.6) 475.0 (159.3) (0.3) (19.2) (178.8) (2.0) 80.6 (19.1) (391.1) 1.4 (8.6) (517.5)
3.3 2.5 (28.0) (22.2) (75.0) (97.2) (0.2) (4.8) (102.2) (102.2)
11.7 2.5 (28.0) (13.8) (50.0) (63.8) (0.2) (4.8) (68.8) (68.8)
37.3 2.5 (28.0) 11.8 (25.0) (13.2) (0.2) (4.8) (18.2) (18.2)
53.4 2.5 (28.0) 27.9 75.0 102.9 (0.2) (4.8) 97.9 97.9
105.8 10.0 (112.0) 3.8 (75.0) 560.0 (71.2) (0.8) (19.2) (91.2) (91.2)
81
December 13, 2011
High Yield
Exhibit 87: KB Home Financial model

($, millions)
11/30/2007 11/30/2008 11/30/2009 11/30/2010 11/30/2010 2/28/2011 5/31/2011 8/31/2011 11/30/2011 FY:07 FY:08 FY:09 4Q:10 FY:10 1Q:11 2Q:11 3Q:11 4Q:11E Balance Sheet Items Homebuilding cash Financial services cash Restricted cash Total Cash and Cash Equivalents Inventories: Homes, lots, and improvements in production Land under development Total Inventories Total Assets Mortgages and Notes Payable Unamortized discounts Total Balance Sheet Debt Joint Venture Recourse Debt & Guarantees Total Debt Outstanding Shareholder's Equity Common shares out (millions) - diluted Share Price Market Capitalization Enterprise Value Operating and Financial Statistics: Operating Performance Measures Homebuilding Revenue Growth Homebuilding Gross Margin (1) SG&A / Homebuilding Revenue Homebuilding Adjusted EBITDA Margin Total Adjusted EBITDA Margin Inventory Impairments / Prior Inventory FFO / Revenue FCF / Revenue Key Coverage Measures Homebuilding Adjusted EBITDA / Interest Incurred Total Adjusted EBITDA / Interest Incurred FFO / Homebuilding Debt FCF / Homebuilding Debt Inventories / Homebuilding Debt (2) Inventories / Net Homebuilding Debt (2) (3) Inventories / Total Debt Inventories / Net Total Debt (2) (3) Key Leverage Measures Homebuilding Debt / Capitalization Net Homebuilding Debt / Capitalization (3) Total Debt / Capitalization Net Debt / Capitalization (3) Homebuilding Debt / Homebuilding Adjusted EBITDA Net Homebuilding Debt / Homebuilding Adjusted EBITDA LTM FY:11E 2/28/2012 5/31/2012 8/31/2012 11/30/2012 1Q:12E 2Q:12E 3Q:12E 4Q:12E FY:12E
1,325.3 18.5 1,343.7 2,474.0 838.4 3,312.4 5,706.0 2,161.8 7.3 2,161.8 262.1 2,423.9 1,850.7 89.5 20.9 1,870.2
1,135.4 6.1 115.4 1,256.9 1,649.8 456.9 2,106.7 4,044.3 1,941.5 4.8 1,941.5 228.1 2,169.6 830.6 77.5 10.4 806.9
1,174.7 3.2 114.3 1,292.3 1,091.9 409.5 1,501.4 3,436.0 1,820.4 8.6 1,820.4 186.5 2,006.9 707.2 76.7 13.6 1,038.7
904.4 4.0 115.5 1,023.9 1,298.1 398.6 1,696.7 3,109.7 1,775.5 7.5 1,775.5 180.0 1,955.5 631.9 76.9 14.3 1,100.3
904.4 4.0 115.5 1,023.9 1,298.1 398.6 1,696.7 3,109.7 1,775.5 7.5 1,775.5 180.0 1,955.5 631.9 76.9 14.3 1,100.3 2,031.9
735.8 6.7 121.2 863.7 1,340.3 434.1 1,774.4 2,901.2 1,701.7 6.8 1,701.7 211.8 1,913.5 514.6 77.0 13.3 1,019.9
621.3 5.9 114.0 741.2 1,390.4 504.6 1,895.0 2,860.3 1,691.7 2.0 1,691.7 226.4 1,918.1 443.5 77.0 9.6 736.7
477.4 2.9 113.2 593.5 1,466.8 433.8 1,900.6 2,721.8 1,586.7 106.9 1,586.7 226.4 1,813.1 432.0 77.0 5.7 440.7
409.5 2.9 91.8 504.1 NA NA NA NA 1,586.7 121.8 1,586.7 1,813.1 434.6 77.0 5.7 440.7
477.4 2.9 113.2 593.5 1,466.8 433.8 1,900.6 2,721.8 1,586.7 106.9 1,586.7 226.4 1,813.1 432.0 77.0 5.7 440.7 1,660.4
409.5 2.9 91.8 504.1 NA NA NA NA 1,586.7 121.8 1,586.7 1,813.1 434.6 77.0 5.7 440.7 1,749.7
307.3 91.8 399.1 NA NA NA NA 1,708.5 1,586.7 1,586.7 406.2 77.0 5.7 440.7
238.5 91.8 330.3 NA NA NA NA 1,708.5 1,586.7 1,586.7 377.1 77.0 5.7 440.7
220.3 91.8 312.1 NA NA NA NA 1,708.5 1,586.7 1,586.7 368.6 77.0 5.7 440.7
318.2 91.8 410.0 NA NA NA NA 1,708.5 1,586.7 1,586.7 374.2 77.0 5.7 440.7
318.2 91.8 410.0 NA NA NA NA 1,708.5 1,586.7 1,586.7 374.2 76.9 5.7 440.7 1,617.4
2,950.3
1,719.6
1,753.4
2,031.9
2,069.7
1,913.6
1,660.4
1,749.7
1,628.3
1,697.1
1,715.3
1,617.4
-31.6% 16.1% 12.9% 1.8% 2.0% 20.5% 3.5% 8.1%
-52.8% 15.0% 16.6% -1.5% -1.3% 28.8% 1.3% 6.1%
-39.9% 23.9% 16.7% 3.6% 3.8% 10.5% 9.2% 19.9%
-33.3% 25.5% 12.4% 13.1% 13.6% 0.2% 9.6% 7.8%
-12.9% 24.1% 18.3% 7.1% 7.4% 1.3% 1.5% -7.1%
-25.6% 19.3% 25.4% -5.5% -5.1% 0.1% -20.0% -81.3%
-27.5% 22.1% 23.2% -0.6% -0.2% 1.2% -9.0% -40.8%
-26.9% 23.2% 16.5% 7.0% 7.4% 0.1% -0.5% -12.2%
6.0% 24.0% 14.0% 10.2% 10.4% NA 5.0% 28.8%
NA 23.2% 17.8% 5.6% 6.1% NA -1.7% -21.8%
-17.5% 22.7% 18.3% 4.7% 5.0% NA -3.2% -13.6%
36.3% 24.0% 23.5% 0.9% 1.2% NA -8.3% -38.1%
20.0% 24.0% 21.0% 3.3% 3.6% NA -4.2% -21.1%
24.2% 24.3% 16.5% 8.0% 8.2% NA 2.6% -4.0%
3.1% 24.5% 14.0% 10.7% 10.9% NA 5.7% 19.9%
17.5% 24.2% 17.9% 6.6% 6.9% NA 0.2% -5.9%
0.6x 0.6x 9.3% 21.3% 1.4x 3.1x 1.4x 3.1x
NM NM 1.8% 8.5% 1.0x 2.0x 1.0x 2.0x
0.5x 0.6x 8.3% 18.1% 0.7x 1.8x 0.7x 1.8x
0.9x 1.0x 1.2% -5.8% 0.9x 1.6x 0.9x 1.6x
0.9x 1.0x 1.2% -5.8% 0.9x 1.6x 0.9x 1.6x
0.8x 0.9x 0.5% -15.5% 0.9x 1.5x 0.9x 1.5x
0.7x 0.8x 0.0% -14.6% 1.0x 1.5x 1.0x 1.5x
0.6x 0.7x -1.2% -15.5% 1.0x 1.4x 1.0x 1.4x
0.5x 0.6x NA NA NA NA NA NA
0.6x 0.7x -1.2% -15.5% 1.0x 1.4x 1.0x 1.4x
0.5x 0.6x -2.3% -9.9% NA NA NA NA
0.6x 0.7x -1.5% -7.6% NA NA NA NA
0.5x 0.5x -0.9% -5.0% NA NA NA NA
0.6x 0.6x -4.2% -23.2% NA NA NA NA
0.9x 0.9x 0.2% -5.7% NA NA NA NA
0.9x 0.9x 0.2% -5.7% NA NA NA NA
56.7% 36.9% 56.7% 36.9% 20.6x 9.2x
72.3% 55.3% 72.3% 55.3% NM NM
73.9% 54.0% 73.9% 54.0% 31.1x 12.8x
75.6% 62.4% 75.6% 62.4% 17.3x 9.3x
75.6% 62.4% 75.6% 62.4% 17.3x 9.3x
78.8% 69.5% 78.8% 69.5% 19.0x 11.6x
81.2% 74.4% 81.2% 74.4% 22.0x 14.8x
80.8% 75.5% 80.8% 75.5% 25.3x 18.6x
80.7% 76.3% 80.7% 76.3% 29.5x 22.8x
80.8% 75.5% 80.8% 75.5% 25.3x 18.6x
80.7% 76.3% 80.7% 76.3% 29.5x 22.8x
79.6% 75.9% 79.6% 75.9% 8.6x 7.0x
80.8% 78.1% 80.8% 78.1% 10.9x 9.2x
81.1% 78.8% 81.1% 78.8% 14.3x 12.3x
80.9% 77.2% 80.9% 77.2% 15.6x 12.5x
80.9% 77.2% 80.9% 77.2% 15.6x 12.5x
(1) Excludes non-cash impairment charges and interest expense amortized in cost of sales (2) Inventories does not include consolidated inventory not owned (3) Net of cash and marketable securities; excludes restricted cash
82
December 13, 2011
High Yield
Metals and Mining: Coverage view and recommendations

Justine Fisher Goldman, Sachs & Co. justine.fisher@gs.com 212-357-6711 Joshua Pinkerton Goldman, Sachs & Co. joshua.pinkerton@gs.com 212-357-9774 We have a Neutral coverage view for the Metals and Mining sector in 2012, as cyclical and secular demand concerns offset decent credit quality for most of the companies we cover. For 2012, we focus on and compare three subsets of Metals and Mining, which correlate with three stages in the supply chain: Mining (ACI, ANR, BTU, CLD, CNX, FMGAU, JRCC) Primary metal (AKS, STLD, X, CENX, NOR) Downstream (MUSA, RYI, HNDLIN)
Our preferences this year are based on where we see secular, cyclical, and margin advantages, as well as incremental yield. We recommend a barbell-shaped investment strategy, owning miners that are at the top of the supply chain and downstream producers that are at the bottom of the supply chain. Within mining, we prefer iron ore and met coal, and think that US thermal coal faces some of the most difficult secular and cyclical headwinds. We think investors should avoid primary metal producers because of their vulnerability to margin squeeze. Exhibit 88: Goldman Sachs HY Metals and Mining universe
Size TKR ANR BTU CNX ACI CLD JRCC FMGAU* Rating IL U IL OP OP U OP (MM) $700 $650 $1250 $500 $300 $275 $2040 Coupon (%) 6.25 6.500 8.25 7.25 8.50 7.875 7.000 Priority Sr Nts Sr Nts Sr Nts Sr Nts Sr Nts Sr Nts Sr Nts Maturity 01-Jun-21 15-Sep-20 01-Apr-20 01-Oct-20 15-Dec-19 01-Apr-19 01-Nov-15 15-May-20 01-Apr-20 15-Mar-20 15-May-14 15-May-15 Agency Ratings Ba3/BB Ba1/BB+ B1/BB B1/B+ B1/BBB2/B+ B1/B Ba3/BB Ba2/BB Ba2/BB+ NA/B B2/B Price 103.130 MW 104.130 103.630 104.250 103.940 105.250 103.810 MW 103.810 104.000 100.000 Next Call Date 01-Jun-16 -01-Apr-15 01-Oct-15 15-Dec-14 01-Apr-15 01-Nov-12 15-May-15 15-Mar-15 12-Dec-11 12-Dec-11 05-Jan-12 05-Jan-12 01-Nov-12 Bid Price 96.250 104.000 109.500 101.500 108.500 74.500 99.500 93.25 97.00 103.50 101.250 94.500 104.750 103.375 100.750 YTW (%) 6.790 5.900 6.160 6.960 6.630 13.455 7.150 6.598 8.770 7.870 6.920 7.064 6.102 7.345 7.850 9.200 11.530 9.527 ZSPRD (bp) 483 403 535 540 588 1185 621 528 695 607 545 642 544 607 625 855 1086 855.3 Est. 2012 Leverage 1.9x 2.1x 2.1x 3.0x 1.6x 6.9x 2.1x 2.1x 3.3x 3.5x 2.3x 2.4x 2.1x 2.7x 3.4x 2.7x 6.9x 3.1x
MINING AVERAGE YIELD AND SPREAD (EXCL. JRCC) AKS IL $550 X U $600 STLD IL $350 CENX IL $250 NOR IL $350 PRIMARY METAL AVERAGE 7.625 Sr Nts 7.375 Sr Nts 7.625 Sr Nts 8.00 Sr Sec L+400 OpCo PIK YIELD AND SPREAD
OP $1,400 8.75 Sr Nts 15-Dec-20 B2/B 102.420 HNDLIN* MUSA OP $275 11.125 Sr Secured 01-Dec-15 B3/B+ 103.710 RYI* IL $382 12.000 Sr Secured 01-Nov-15 Caa1/CCC+ 103.000 DOWNSTREAM AVERAGE YIELD AND SPREAD * FMGAU and HNDLIN leverage is for FY2013, RYI leverage includes Holdco notes
Our price forecasts for 2012 are below. The key changes we have made are (1) a $110/tonne Newcastle thermal coal price (down from $119/tonne previously on the heels of higher supply in Asia and weaker demand from Europe, and in line with our equity research colleagues forecast), and (2) a $70-75/ton CAPP thermal coal price range (we had previously expected a range of $75-80/ton, but have lowered our forecast on the heels of lower natural gas prices, weak demand, and lower global thermal prices).
83
December 13, 2011
High Yield
Exhibit 89: Goldman Sachs HY price forecasts for 2011
Ironore($/tonne) CAPPThermal($/ton) PRB8,800($/ton) GlobalThermal(Newcastle,$/tonne) BenchmarkGlobalMet($/tonne) ImpliedUSpriceFOBmine($/ton) USBenchmarkHotRolledCoil($/ton) LMEAluminum($/lb.)

Source: Goldman Sachs Research.
2012GSHY PriceForecast $150 $7075 $13 $110 $215 $150 $715 $1.05
Mining: Prefer iron ore and met coal to thermal coal, which faces cyclical and secular risks
We expect most miners we cover to generate solid margins in 2012 (with the notable exception of James River Coal) despite our lower yoy price forecasts for coal and iron ore.
Iron ore. We like iron ore price fundamentals because we expect Chinese mills and
traders to buy higher-quality imported ore if prices fall to $120/tonne, as they did in October 2011. This buying behavior effectively sets a floor on pricing at a margin that is still solid for producers such as FMG. Iron ore prices have rebounded to around $140/tonne over the last few weeks.
Exhibit 90: Iron ore prices have rebounded to roughly $140/tonne
220
IronorefinesspotpriceCFRNorthChina 62%Fe($/Dmt)
200 180 160 140 120 100 80 60 40 18Jun08 18Jun09 18Jun10 18Jun11
Source: Platts.
84
December 13, 2011
High Yield
Met coal. The US is a key supplier of met coal to the global market, but many US
producers have much higher costs than peers in Canada and Australia. East Coast export terminals are also farther away from key Asian consumers, leaving the US reliant on European buyers for 40-50% of total exports. In a year in which we expect overall weaker global demand for met coal because of lower demand from Europe and slightly more constrained growth from China, we expect US met coal exports to lose some ground on volumes and pricing. We see the most risk to high-vol (lower quality) and PCI met coal prices, as these grades may lose buyers in a weaker market. Still, our 2012 benchmark met coal price of $215/tonne should yield decent margins for the met producers that we cover.
Thermal coal. Thermal coal is our least-favorite mined commodity this year, as we
see cyclical and secular disadvantages in the US that should squeeze margins, especially for smaller producers. On the positive side, US inventories are in better shape heading into 2011 than they have been in previous years they have declined to their seven-year average of 150 million tons. On the other hand, we expect weak demand to offset this better supply situation and keep prices subdued. Our colleagues in equity research expect US weathernormal power demand to increase only 0.3% in 2012, and on a raw demand basis (which excludes the favorable weather impact in 2011), they expect power demand to actually decrease by 1.1% in 2012.
Exhibit 91: US utility inventories are at their 7-year average

(tons, millions)
Exhibit 92: But power demand growth should be minimal
200 180 160 140 120 100
GSEquityEst.Powerdemandgrowth 2012 2013 National 0.3% 1.1% Industrial 0.2% 0.7% Residential 0.4% 0.9% Commercial 0.7% 1.5%
Oct07 Oct08 Oct09 Oct10 Apr07 Apr08 Apr09 Apr10 Apr11 Oct11 Jan07 Jan08 Jan09 Jan10 Jan11 Jul07 Jul08 Jul09 Jul10 Jul11
2014 1.1% 0.7% 0.9% 1.5%
Utilityinventories
20072011Average
20052011Average
Source: EIA.
Source: Goldman Sachs Global ECS Research, Goldman Sachs Research estimates.
Demand for US thermal coal from the international market should weaken as well, taking away a key positive catalyst that we think many market observers had been relying on for upward movement in US thermal coal prices. With (1) our economists forecasting a mild recession in Europe for 2012, (2) Chinese and South African thermal coal inventories high, and (3) Indonesian exports set to remain high, we expect conditions in the global thermal markets to loosen in 2012.
85
December 13, 2011
High Yield
Exhibit 93: Chinas monthly coal inventories at IPPs are at the high end of the seasonal range
Days 30 2005-2010 range 2011 25
Exhibit 94: South African inventories at Richards Bay are at historical highs
6.00 5.50 5.00 4.50 Richards Bay port inventories reaching historical highs
20
4.00 3.50
15
3.00 2.50
10
2.00 1.50
1.00
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: SXCoal, CEIC, McCloskey, Goldman Sachs Research.
Source: McCloskey.
Finally, our colleagues in commodities research are forecasting an average price of $3.70/mmBtu for natural gas in 2012, which should reduce coal demand by 50 million tons because of coal-to-gas switching. We expect PRB pricing to remain around $13/ton on cyclical factors such as sluggish US economic growth, and ample supply in the basin. But, we still prefer PRB producers (such as OP-rated Arch Coal and Cloud Peak) to Appalachian producers because of less vulnerability to coal-to-gas switching and a better cost outlook. We see more concerning secular issues with Appalachia thermal producers, where natural gas and potential government regulation are reducing demand, and where input and regulatory costs are increasing. We expect notable margin squeeze for small producers in this basin.
Primary metal: Expect steel margins to remain choppy

We expect the primary metal producers in the supply chain to feel the most margin squeeze this year. We focus here on the steel names AKS, X, and STLD because the primary aluminum producer bonds (CENX and NOR) are illiquid. We have made the argument over the last couple of years that sub-80% capacity utilization for US mills should lead to choppy prices and difficult margin management. We expect mill capacity utilization to be below 80% again in 2012 as a result of higher US steel supply from companies such as Severstal, ThyssenKrupp, Steel Dynamics and RG Steel, and lower demand. Specifically, our colleagues in equity research expect US mill shipments of 95 million tons in 2012, which is below the 100-110 million ton/year run rate we saw from 2005 to 2007.
86
December 13, 2011
High Yield
Exhibit 95: We expect US steel capacity utilization to remain below 80% in 2012
FINAL STEEL DEMAND (Consumption) Percent change Inventory change (+/-) As % of final demand APPARENT STEEL DEMAND Percent change PER CAPITA APPARENT CONSUMPTION Total imports Exports Net imports Net imports (including semis) as % of apparent demand Semifinished imports (incl. in US shipments) US steel mill shipments Percent change U.S. operating rate
2005 124.5 (2.7%) (3.7) (3.0%) 120.8 (8.1%) 373.2 32.1 9.4 22.7 18.8% 6.9 105.0 (5.4%) 86.1%
2006 129.7 4.1% 6.1 4.7% 135.8 12.4% 410.4 45.3 9.7 35.5 26.2% 9.3 109.5 4.3% 87.9%
2007 127.8 (1.4%) (5.9) (4.6%) 121.9 (10.2%) 369.0 33.2 11.1 22.2 18.2% 6.7 106.4 (2.9%) 87.0%
2008 2009 114.3 73.8 (10.6%) (35.4%) (3.3) (2.9%) 111.0 (8.9%) 332.5 31.9 13.5 18.5 16.6% 6.0 98.5 (7.4%) 80.8% (6.7) (9.1%) 67.1 (39.6%) 192.9 16.2 9.3 6.9 10.3% 2.0 62.2 (36.9%) 51.4%
2010 85.5 15.9% 4.7 5.5% 90.2 34.5% 307.2 23.9 12.0 11.9 13.1% 5.0 83.4 34.1% 70.4%
2011E 92.7 8.4% 2.0 2.2% 94.7 5.0% 323.2 26.0 13.0 13.0 13.7% 6.5 88.2 5.8% 75.0%
2012E 98.2 5.9% 2.0 2.0% 100.2 5.8% 340.4 25.0 12.0 13.0 13.0% 7.5 94.7 7.3% 78.0%
Source: Goldman Sachs Research estimates, International Iron and Steel Institute, US Census Bureau.
We highlight that low service center inventories should allow mills to push through periodic price increases, leading to some short periods of pricing strength. Generally, however, we dont expect strong prices to be sustainable. Exhibit 96: Service center inventories still relatively low, with 2.5 months of supply on hand
15,000 14,000
Exhibit 97: We expect HRC prices to average $715/ton in 2012

$800 $750 $700
4.0 3.8 3.6
Monthly Inventories ('000 tons)
13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000
Months' Supply on Hand
3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0
$650 $600 $550 $500
5,000 1.8 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Inventory Month's supply
HRC prices
GS 2012 Avg at $715
Source: MSCI.
Steel producers may see some relief on the raw materials front, with lower coal and iron ore prices potentially providing some breathing room for AK Steel, and US Steel possibly benefitting from lower coal/coke prices. However, we do not have good insight into the absolute raw materials contract levels for AKS and X, so we cannot base our cost assumptions on market levels for these commodities. The ultimate cost relief could be lower (or higher) than what spot market prices indicate. Also, we think these raw material prices play a key role in setting the cost floor for prices; if raw materials costs decline, we think it creates potential for prices to move below previous cost support levels, thereby squeezing margins in either scenario. We think sustained end-user demand, coupled with
87
December 13, 2011
High Yield
some supply rationalization on the supply side, will be needed for meaningful and sustainable price improvement.
Downstream producers: Best margin flexibility

For investors who view mining yields as too tight or do not want to take coal risk, we recommend moving all the way down to the end of the metals and mining supply chain to the downstream producers. We preferred this area of the supply chain for 2011 and we prefer it again for 2012 because downstream producers such as aluminum can-sheet maker Novelis and service center Metals USA have very low fixed costs, which make their margins more flexible in a volatile commodity price environment. Also, they tend to generate cash from working capital as prices decline and as they liquidate inventories. We recently downgraded Ryerson, Inc. to In-Line from Outperform owing to its highly-levered capital structure (6.9x debt/EBITDA for 2012 including its Holdco notes), but we think other downstream companies are well-positioned with their lower leverage (we expect 2012 leverage of 2.7x for Metals USA and FY2013 leverage of 3.4x for Novelis).
Fortescue Metals Group Limited: Attractive iron ore exposure and margins
Exhibit 98: FMG benchmark security
Size TKR FMGAU Rating OP (MM) $2040 Coupon (%) 7.000 Priority Sr Nts Maturity 01-Nov-15 Agency Ratings B1/B Price 105.250 Next Call Date 01-Nov-12 Bid Price 99.500 YTW (%) 7.150 ZSPRD (bp) 621
Credit should outperform in 2012 on solid margins, low leverage

FMG is one of our top picks because it has the combination of a higher yield versus peers (7.15% for the 2015 bonds and 8.3% for the 2019 bonds versus the 6.5-7.5% range for HY mining peers) and exposure to global iron ore, which we view as having positive secular catalysts based on Chinese demand for high-quality imports. We think this exposure compares favorably with other mining peers with significant thermal coal exposure. When iron ore prices dropped to $117/tonne in late October, we were concerned that we had been too sanguine in our iron ore price outlook for 2012 ($150/tonne) and that FMG would face a significant margin squeeze in the face of slower global economic growth. The silver lining of this price decline, however, was that it tested where the current floor is for iron ore prices in China. Chinese buyers came back into the market when prices hit around $120/tonne in October, and prices are now roughly $140/tonne. This is in line with the level we had expected would motivate opportunistic Chinese buying of imported ore. We therefore remain comfortable with our price forecast of an average of $150/tonne for 2012. This is lower than what we expect pricing to average for 2011 (around $160/tonne in light of the price decline we have seen so far in 4Q), but with FMGs C1 costs around $4550/tonne, it would still imply strong margins. We expect leverage of 1.8x for FY2012 (ending June 30, 2012) and 2.1x for FY2013.
88
December 13, 2011
High Yield

Key risks to our view are lower iron ore prices, higher-than-expected capex spending, and lack of access to the capital markets to complete its capex program.
Recent developments: 8.25% bond issue should fund capex through mid-2013
FMGs issuance of $1.5 billion of 8.25% senior notes in November 2011 achieved a critical financing goal for the company. We believe that FMG will have to raise $2.0 billion of debt by the end of its fiscal year 2013 (which ends June 30, 2013) in order to fully fund its capex program. The 8.25% bond deal went a long way towards accomplishing that goal, and gave FMG at least a year during which it will not have to access the capital markets. We think this is positive in light of the macro uncertainty and volatility we have seen in iron ore prices. In fact, capex funding was the critical concern that investors voiced to us during conversations over the summer and the fall, and we think this bond deal allayed many of those concerns. On the negative side, the bond added a significant amount of FMG paper to the market, and we think that FMG may have created somewhat of a negative technical in its bonds by issuing a substantial amount of similar bonds in quick succession over the last year (roughly $5 billion in total). We think investors may have little appetite for additional FMG debt, and this may be a reason why FMGs bonds trade wide to peers despite the companys substantially higher market capitalization, size, and cash flow. We continue to see potential for a ratings upgrade (FMG is still rated B1/B despite its larger size versus double-B rated mining peers).
Company description
FMG is a large iron ore producer based in Australia. It has plans to expand production to 155 million tonnes per annum.
89
December 13, 2011
High Yield
Exhibit 99: FMG Financial model

FMG Model
FINANCIAL SUMMARY US$ (millions) OPERATING STATISTICS Cloudbreak volumes Christmas Creek volumes TOTAL VOLUMES INCOME STATEMENT Total Revenues Cost of Sales Gross Profit Gross Margin Selling General & Administrative EBITDA EBITDA Margin Depreciation, Depletion and Amortization Operating Income Other Income, net Interest Expense Pretax Income Income Taxes Minority Interest & Equity In Subsidiaries Net Income CASH FLOW EBITDA EBITDA Margin Operating Cash Flow Before Working Capital Change in Working Capital Capital Expenditures Acquisitions Asset Sales Equity Issuance Debt Issuance Debt Redemptions Dividends, Distributions, and Share Repurchases Other CHANGE IN CASH 1,223 38.0% 1,647 (14) (584) 0 28 2 30 (16) 0 (28) 1,066 1,290 50.9% 821 90 (511) 0 7 1 3,453 (2,009) 0 (736) 1,116 1,475 50.7% 1,977 (109) (917) 0 3 0 0 0 (96) (137) 722 2,765 50.8% 2,798 (19) (1,428) 0 10 2 3,453 (2,009) (96) (873) 1,838 1,044 58.4% 897 (132) (1,000) 0 0 0 0 (51) (93) 0 (379) 738 45.9% 622 83 (1,000) 0 0 0 1,500 (49) 0 0 1,157 729 45.5% 592 64 (1,800) 0 0 0 0 (49) (93) 0 (1,286) 736 45.9% 596 6 (1,800) 0 0 0 0 (49) 0 0 (1,247) 3,248 49.2% 2,707 21 (5,600) 0 0 0 1,500 (197) (187) 0 (1,755) 2,937 38.2% 2,269 30 (2,246) 0 0 0 500 (204) (187) 0 162 2,765 50.8% 2,798 (19) (1,428) 0 10 2 3,453 (2,009) (96) (873) 1,838 3,220 (1,972) 1,248 38.7% (25) 1,223 38.0% (153) 1,070 (96) (394) 579 2 0 581 2,533 (1,191) 1,342 53.0% (52) 1,290 50.9% (95) 1,195 (713) (214) 269 45 0 314 2,909 (1,389) 1,520 52.2% (45) 1,475 50.7% (82) 1,393 (110) (216) 1,066 (358) 0 708 5,442 (2,581) 2,862 52.6% (97) 2,765 50.8% (177) 2,588 (823) (430) 1,335 (313) 0 1,023 1,786 (717) 1,069 59.8% (25) 1,044 58.4% (64) 980 10 (64) 926 (93) 0 833 1,610 (842) 768 47.7% (30) 738 45.9% (75) 663 9 (64) 607 (61) 0 547 1,605 (845) 759 47.3% (30) 729 45.5% (87) 642 13 (94) 561 (56) 0 505 1,605 (838) 766 47.8% (30) 736 45.9% (108) 628 8 (94) 542 (54) 0 488 6,606 (3,243) 3,363 50.9% (115) 3,248 49.2% (334) 2,914 40 (317) 2,637 (264) 0 2,373 7,691 (4,634) 3,057 39.7% (120) 2,937 38.2% (549) 2,388 10 (376) 2,024 (304) 0 1,720 5,442 (2,581) 2,862 52.6% (97) 2,765 50.8% (177) 2,588 (823) (430) 1,335 (313) 0 1,023 17.0 2.5 19.5 17.8 4.0 21.8 34.8 6.5 41.2 8.1 4.1 12.2 9.0 4.8 13.8 9.0 5.0 14.0 9.0 5.0 14.0 35.1 18.9 54.0 37.2 44.5 81.7 FY Ended 06/30/10 1H10 Ended 12/31/10 2H10 Ended 06/30/11 FY Ended 06/30/11 1QE Ended 09/30/11 2QE Ended 12/31/11 3QE Ended 03/31/12 4QE Ended 06/30/12 Projected FY Ended 06/30/12 06/30/13 LTM 06/30/11
90
December 13, 2011
High Yield
Exhibit 100: FMG Financial model

FMG Model
FINANCIAL SUMMARY US$ (millions) COVERAGE & LEVERAGE EBITDA / Total Interest Debt / EBITDA SUMMARY BALANCE SHEET Cash and Marketable Securities Receivables Inventory Other Current Assets Current Assets Net Plant and Equipment Goodwill Deferred taxes & Other Assets Total Assets Short-Term and Current Debt Payables Accrued Expenses Other Current Liabilities Current Liabilities Senior Secured Debt Senior Debt Senior Subordinated Debt Junior and Convertible Debt Non-Recourse Debt Long-Term Debt Other Long Term Liabilities Preferred Stock at Liquidation Value Total Equity less Preferred Stock Total Liabilities & Equity 1,236 269 188 9 1,702 3,424 23 155 5,304 467 406 0 16 889 2,509 0 0 0 0 2,509 429 0 1,477 5,304 2,382 400 263 11 3,056 3,824 23 232 7,136 204 587 0 0 791 4,247 0 0 0 0 4,247 286 0 1,811 7,136 2,663 400 417 15 3,494 5,093 21 17 8,626 197 813 0 108 1,118 4,465 0 0 0 0 4,465 609 0 2,434 8,626 2,663 400 417 15 3,494 5,093 21 17 8,626 197 813 0 108 1,118 4,465 0 0 0 0 4,465 609 0 2,434 8,626 2,283 408 408 11 3,110 6,030 21 21 9,182 198 680 0 108 985 145 3,565 704 0 0 4,414 609 0 3,174 9,182 3,440 263 315 0 4,018 6,954 21 32 11,025 200 525 0 108 833 142 5,065 656 0 0 5,863 609 0 3,721 11,025 2,154 232 321 15 2,722 8,667 21 17 11,427 202 564 0 108 874 139 5,065 608 0 0 5,812 609 0 4,133 11,427 907 229 317 15 1,469 10,359 21 17 11,866 204 564 0 108 877 136 5,065 560 0 0 5,761 609 0 4,621 11,866 907 229 317 15 1,469 10,359 21 17 11,866 204 564 0 108 877 136 5,065 560 0 0 5,761 609 0 4,621 11,866 1,069 310 405 15 1,800 12,056 21 17 13,894 0 763 0 108 871 136 5,565 560 0 0 6,261 609 0 6,154 13,894 2,663 400 417 15 3,494 5,093 21 17 8,626 197 813 0 108 1,118 4,465 0 0 0 0 4,465 609 0 2,434 8,626 3.1 2.4 6.0 0.9 6.8 0.8 6.4 1.7 16.3 1.1 11.5 2.1 7.8 2.1 7.8 2.0 10.3 1.8 7.8 2.1 6.4 1.7 06/30/10 1H10 Ended 12/31/10 2H10 Ended 06/30/11 FY Ended 06/30/11 1QE Ended 09/30/11 2QE Ended 12/31/11 3QE Ended 03/31/12 4QE Ended 06/30/12 Projected FY Ended 06/30/12 06/30/13 LTM 06/30/11
** Note: Our debt numbers here include all Leucadia debt, as shown on the balance sheet. Leverage numbers in our capitalization table exclude all but $100m of Leucadia.
Novelis, Inc.: Rated Outperform on stable end markets and cash flow
Exhibit 101: Novelis benchmark security
Size TKR HNDLIN Rating OP (MM) $1,400 Coupon (%) 8.75 Priority Sr Nts Maturity 15-Dec-20 Agency Ratings B2/B Price 102.420 Next Call Date 05-Jan-12 Bid Price 104.750 YTW (%) 7.850 ZSPRD (bp) 625
Global footprint and flexible costs should help Novelis outperform in 2012
Noveliss leverage is higher than other large HY Metals and Mining peers we expect 3.4x leverage for FY2013 ending March 31, 2013, which is similar to steel mills X and AKS but higher than miners, which are close to 2.0x. Even so, we think the companys global footprint and low cost structure can support this level of leverage. We also think Noveliss business model and market position are attractive in a year during which we expect to see volatile commodity prices and margin squeezes for companies (such as steel mills) with high fixed costs. Novelis can sheet end market should
91
December 13, 2011
High Yield
see relatively stable demand compared with other aluminum and steel end markets such as transportation and construction. We also think it has some of the best regional diversification of the credits that we cover.

Key risks to our view are cost overruns and delays on Noveliss capex program, and high dividends paid to Hindalco.
Recent developments: Korean subsidiary acquisition and term loan added some leverage, but we think it is manageable
Novelis recently announced that it would acquire the 31.2% stake of its Korean subsidiary (Novelis Korea Limited) that it did not own for $350 million. Prior to this acquisition, Novelis owned 67.9% of the subsidiary, but the results of Novelis Korea were still fully reflected in the companys operating results. On the negative side, Novelis has financed this acquisition with $225 million of additional debt (via an add-on to its term loan), which added roughly 0.2x of leverage to our model and reduced our cash balance forecast to $95 million for the end of the December quarter. Noveliss Korean subsidiary is also not a guarantor of the bonds Novelis owns 99.1% of the shares, and the subsidiary will not become a guarantor unless it is 100% owned. In the meantime, Novelis has added secured corporate debt to the balance sheet ahead of the bonds, but to fund spending at a non-guarantor subsidiary. We also think the timing of this acquisition was not ideal in light of the companys substantial capex program. Our concerns are somewhat offset by our belief that the consolidation of Noveliss ownership, while not adding EBITDA to the income statement, should give Novelis more control over the future of its Asian footprint. We also expect Noveliss bondholders to benefit from Novelis Koreas EBITDA even though it is not a guarantor of the bonds. Finally, we would expect Novelis to forego any dividends in FY2013 (we are currently modeling a $200 million dividend to Hindalco) if it needed additional cash to fund capex. Overall, we view the acquisition as slightly negative given the increase in debt, but believe this is offset by the attractiveness of Noveliss business model and market share in the current environment. The Novelis bonds trade at roughly $104.75, which is high compared with peers that trade at or slightly below par. This higher dollar price may be an unattractive characteristic for some investors, but with the volatility that we expect in the market this year (especially for names such as US Steel and AK Steel), we would rather own Novelis at a few points above par than take risk in the steel sector, which we do not view as attractive for 2012.
Company description
Novelis is a downstream manufacturer of aluminum can sheet. It has operations in the US, Europe, Latin America, and Korea.
92
December 13, 2011
High Yield
Exhibit 102: Novelis Financial model

Novelis, Inc.
FINANCIAL SUMMARY US$ (millions) OPERATING STATISTICS North America Rolled Product Volumes Europe Rolled Product Volumes Asia Rolled Product Volumes South America Rolled Product Volumes INCOME STATEMENT Total Revenues Cost of Sales Gross Profit Gross Margin Selling General & Administrative EBITDA EBITDA Margin Depreciation and Amortization Operating Income Other Income, net Interest Expense Pretax Income Income Taxes Minority Interest & Equity In Subsidiaries Net Income CASH FLOW EBITDA EBITDA Margin Operating Cash Flow Before Working Capital Change in Working Capital Capital Expenditures Acquisitions Asset Sales Equity Issuance Debt Issuance Debt Redemptions Dividends, Distributions, and Share Repurchases Other CHANGE IN CASH 1,042 9.9% 1,332 (125) (234) 0 31 0 4,034 (2,594) (1,718) (103) 623 307 9.9% 203 (318) (67) 0 0 0 190 (5) 0 (9) (6) 290 10.1% 139 32 (107) 0 1 0 6 (151) 0 61 (19) 202 8.5% 123 54 (175) (350) 0 0 225 (68) 0 0 (191) 280 10.9% 186 (15) (175) 0 0 0 0 (5) 0 0 (9) 1,080 9.9% 650 (247) (524) (350) 1 0 421 (230) 0 52 (226) 358 13.1% 249 40 (160) 0 0 0 0 (5) 0 0 123 308 11.6% 209 (81) (160) 0 0 0 0 (4) (50) 0 (86) 298 11.6% 201 51 (160) 0 0 0 0 (4) (50) 0 38 294 10.5% 199 19 (160) 0 0 0 0 (4) (100) 0 (46) 1,258 11.7% 858 28 (640) 0 0 0 0 (17) (200) 0 29 1,574 12.3% 1,114 (100) (640) 0 0 0 0 0 (300) 0 75 1,100 9.6% 585 (199) (337) 0 14 0 4,230 (2,692) (1,700) (129) (228) 10,577 (9,160) 1,417 13.4% (375) 1,042 9.9% (404) 638 (188) (207) 243 (83) (44) 116 3,113 (2,711) 402 12.9% (95) 307 9.9% (89) 218 (5) (77) 136 (59) (15) 62 2,880 (2,499) 381 13.2% (91) 290 10.1% (81) 209 (9) (77) 123 7 (10) 120 2,380 (2,082) 297 12.5% (95) 202 8.5% (101) 101 1 (76) 27 (5) 0 22 2,576 (2,201) 375 14.6% (95) 280 10.9% (118) 162 0 (78) 84 (17) 0 68 10,949 (9,493) 1,456 13.3% (376) 1,080 9.9% (389) 690 (12) (308) 371 (74) (25) 271 2,746 (2,293) 453 16.5% (95) 358 13.1% (120) 238 0 (78) 161 (32) 0 128 2,660 (2,257) 403 15.1% (95) 308 11.6% (122) 186 1 (78) 109 (22) 0 87 2,576 (2,184) 393 15.2% (95) 298 11.6% (123) 174 1 (78) 97 (19) 0 78 2,803 (2,414) 389 13.9% (95) 294 10.5% (125) 170 1 (78) 93 (19) 0 74 10,785 (9,147) 1,638 15.2% (380) 1,258 11.7% (491) 768 3 (311) 459 (92) 0 367 12,786 (10,832) 1,954 15.3% (380) 1,574 12.3% (513) 1,061 2 (311) 751 (150) 0 601 11,513 (10,030) 1,483 12.9% (383) 1,100 9.6% (367) 733 (152) (282) 299 (64) (49) 186 1,105.0 907.0 580.0 377.0 274.0 237.0 152.0 90.0 274.0 227.0 131.0 88.0 248.9 197.6 143.6 97.0 266.0 228.0 158.1 102.0 1,062.9 889.6 584.6 377.0 282.2 244.1 159.6 94.5 282.2 233.8 137.6 92.4 256.4 203.5 150.7 101.9 274.0 234.8 166.0 107.1 1,094.8 916.3 613.9 395.8 1,127.6 943.8 744.6 615.6 FY Ended 03/31/11 1Q Ended 06/30/11 2Q Ended 09/30/11 3QE Ended 12/31/11 4QE Ended 03/31/12 FY Ended 03/31/12 1QE Ended 06/30/12 2QE Ended 09/30/12 3QE Ended 12/31/12 4QE Ended 03/31/13 Projected FY Ended 03/31/13 03/31/14 LTM 09/30/11
Exhibit 103: Novelis Financial model

Novelis, Inc.
FINANCIAL SUMMARY US$ (millions) COVERAGE & LEVERAGE EBITDA / Total Interest Debt / EBITDA Net Debt / EBITDA SUMMARY BALANCE SHEET Cash and Marketable Securities Receivables Inventory Other Current Assets Current Assets Net Plant and Equipment Goodwill Deferred taxes & Other Assets Total Assets Short-Term and Current Debt Payables Accrued Expenses Other Current Liabilities Current Liabilities Senior Secured Debt Senior Debt Senior Subordinated Debt Junior and Convertible Debt Non-Recourse Debt Long-Term Debt Other Long Term Liabilities Preferred Stock at Liquidation Value Total Equity less Preferred Stock Total Liabilities & Equity 311 1,508 1,338 254 3,411 2,543 611 1,731 8,296 38 1,428 568 125 2,159 1,489 2,576 0 0 0 4,065 1,627 0 445 8,296 307 1,631 1,435 257 3,630 2,560 611 1,724 8,525 228 1,379 487 113 2,207 1,493 2,576 0 0 0 4,069 1,696 0 553 8,525 286 1,451 1,258 257 3,252 2,528 611 1,616 8,007 83 1,156 503 210 1,952 1,487 2,576 0 0 0 4,063 1,531 0 461 8,007 95 1,293 1,242 257 2,887 2,952 611 1,589 8,039 18 1,035 503 210 1,766 1,685 2,575 0 0 0 4,260 1,531 0 483 8,039 85 1,288 1,374 257 3,004 3,009 611 1,588 8,212 17 1,145 503 210 1,875 1,681 2,575 0 0 0 4,256 1,531 0 550 8,212 85 1,288 1,374 257 3,004 3,009 611 1,588 8,212 17 1,145 503 210 1,875 1,681 2,575 0 0 0 4,256 1,531 0 550 8,212 209 1,328 1,358 257 3,151 3,048 611 1,586 8,397 12 1,207 503 210 1,932 1,681 2,575 0 0 0 4,256 1,531 0 679 8,397 123 1,359 1,359 257 3,097 3,087 611 1,585 8,379 8 1,156 503 210 1,877 1,681 2,575 0 0 0 4,256 1,531 0 716 8,379 161 1,344 1,288 257 3,050 3,123 611 1,583 8,367 4 1,120 503 210 1,837 1,681 2,575 0 0 0 4,256 1,531 0 743 8,367 115 1,402 1,339 257 3,112 3,158 611 1,581 8,463 0 1,246 503 210 1,959 1,681 2,575 0 0 0 4,256 1,531 0 717 8,463 115 1,402 1,339 257 3,112 3,158 611 1,581 8,463 0 1,246 503 210 1,959 1,681 2,575 0 0 0 4,256 1,531 0 717 8,463 189 1,679 1,562 257 3,687 3,285 611 1,575 9,158 0 1,640 503 210 2,353 1,681 2,575 0 0 0 4,256 1,531 0 1,019 9,158 286 1,451 1,258 257 3,252 2,528 611 1,616 8,007 83 1,156 503 210 1,952 1,487 2,576 0 0 0 4,063 1,531 0 461 8,007 5.0 3.9 3.6 4.0 3.5 3.2 3.8 3.6 3.3 2.7 5.3 5.2 3.6 3.8 3.7 3.5 4.0 3.9 4.6 3.0 2.8 3.9 3.5 3.4 3.8 3.6 3.4 3.8 3.6 3.5 4.0 3.4 3.3 5.1 2.7 2.6 3.9 3.8 3.8 03/31/11 1Q Ended 06/30/11 2Q Ended 09/30/11 3QE Ended 12/31/11 4QE Ended 03/31/12 FY Ended 03/31/12 1QE Ended 06/30/12 2QE Ended 09/30/12 3QE Ended 12/31/12 4QE Ended 03/31/13 Projected FY Ended 03/31/13 03/31/14 LTM 09/30/11
Source: Company reports and Goldman Sachs Global Credit Research estimates
93
December 13, 2011
High Yield
James River Coal: Dwindling CAPP thermal margins drive our negative view
Exhibit 104: James River benchmark security
Size TKR JRCC Rating U (MM) $275 Coupon (%) 7.875 Priority Sr Nts Maturity 01-Apr-19 Agency Ratings B2/B+ Price 103.940 Next Call Date 01-Apr-15 Bid Price 74.500 YTW (%) 13.455 ZSPRD (bp) 1185
JRCC should underperform in 2012 owing to negative cyclical and secular drivers
James River Coal is exposed to the US thermal coal market, which we expect to be harmed by cyclical and secular trends in 2012. On the cyclical side, US economic growth should remain sluggish, reducing domestic demand for coal. Also, slower European economic growth should reduce the pull of exports from the US, thereby reducing price upside. On the secular side, we expect low natural gas prices, environmental regulations, and other safety regulations in Appalachia to drive JRCCs thermal coal margins close to zero. Minimal EBITDA from JRCCs largest asset base (CAPP thermal coal) leaves its EBITDA largely dependent on only 2.6 million tons of met coal, only 30% of which is mined internally (the remaining traded coal is open to margin risks), and only some of which is high-quality met. We note that JRCCs $209 million cash balance should support operating cash burn through 2013 (we expect year-end 2013 cash of $67 million). This cash balance affords the company a long runway to wait for met price improvement, and could keep investors comfortable with the bonds. But if market conditions do not change in 2014, we expect JRCC to run out of cash absent a capital raise. We think this risk requires higher reward for investors than the 13.4% yield on JRCCs bonds.

Key risks to our view are higher thermal coal prices and lower costs.
Recent developments
JRCCs 3Q EBITDA was $32 million, below consensus estimates of roughly $50 million. The company missed two met shipments during the quarter, which brought met pricing and volumes below expectations. CAPP pricing was lower because of lower utility demand. JRCCs management said that uncertainty regarding environmental regulations kept utilities out of the market and therefore depressed prices. Midwest costs were higher as JRCC ran operations at a reduced rate in response to lower demand.
Company description
JRCC is a miner of primarily thermal coal in Appalachia. It has a smaller metallurgical mining and trading business as well.
December 13, 2011
High Yield
Exhibit 105: James River Coal Financial model

James River Coal Company
FINANCIAL SUMMARY US$ (millions) OPERATING STATISTICS CAPP Steam Volumes CAPP Met Volumes Midwest Volumes INCOME STATEMENT Total Revenues Cost of Sales Gross Profit Gross Margin Selling General & Administrative EBITDA EBITDA Margin Depreciation, Depletion and Amortization Operating Income Other Income, net Interest Expense (incl. ~$5m/qtr noncash interest) Pretax Income Income Taxes Minority Interest & Equity In Subsidiaries Net Income CASH FLOW EBITDA EBITDA Margin Operating Cash Flow Before Working Capital Change in Working Capital Capital Expenditures Acquisitions Asset Sales Equity Issuance Debt Issuance Debt Redemptions Dividends, Distributions, and Share Repurchases Other CHANGE IN CASH 148 21.1% 262 32 (95) 0 0 0 0 0 0 (1) 197 22 13.2% 13 (3) (20) 0 0 171 505 (279) 0 (14) 373 49 14.0% 39 38 (38) (516) 0 (0) 0 129 0 0 (349) 30 9.9% 21 21 (37) 0 0 0 0 0 0 (2) 4 41 13.5% 33 4 (43) 0 0 0 0 0 0 0 (5) 142 12.6% 106 60 (138) (516) 0 171 505 (150) 0 (16) 23 22 7.7% 14 1 (28) 0 0 0 0 0 0 0 (13) 22 7.6% 14 1 (28) 0 0 0 0 0 0 0 (12) 22 7.6% 14 1 (28) 0 0 0 0 0 0 0 (13) 20 7.0% 12 1 (28) 0 0 0 0 0 0 0 (15) 86 7.5% 53 3 (110) 0 0 0 0 0 0 0 (53) 61 5.4% 27 1 (110) 0 0 0 0 0 0 0 (82) 127 13.0% 97 53 (131) (516) 0 171 505 (150) 0 (16) 13 701 (515) 187 26.6% (38) 148 21.1% (64) 84 1 (30) 55 24 0 78 165 (134) 31 18.9% (9) 22 13.2% (16) 6 (4) (8) (7) (1) 0 (8) 352 (288) 64 18.2% (15) 49 14.0% (28) 21 (4) (16) 1 (0) 0 1 304 (258) 46 15.2% (16) 30 9.9% (31) (1) 0 (13) (14) 10 0 (4) 303 (246) 57 18.8% (16) 41 13.5% (29) 12 1 (14) (1) 0 0 (1) 1,124 (925) 198 17.7% (57) 142 12.6% (105) 37 (7) (46) (21) 9 0 (12) 288 (250) 38 13.2% (16) 22 7.7% (30) (7) 1 (14) (21) 0 0 (21) 290 (251) 38 13.2% (16) 22 7.6% (30) (7) 1 (14) (21) 0 0 (21) 290 (251) 38 13.2% (16) 22 7.6% (29) (7) 1 (14) (21) 0 0 (21) 286 (250) 36 12.6% (16) 20 7.0% (29) (9) 1 (14) (23) 0 0 (23) 1,153 (1,002) 150 13.0% (64) 86 7.5% (118) (32) 4 (57) (85) 0 0 (85) 1,124 (999) 125 11.1% (64) 61 5.4% (117) (56) 1 (57) (110) 0 0 (110) 983 (805) 177 18.0% (50) 127 13.0% (92) 36 (8) (44) (17) 32 0 15 2.8 0.7 6.1 1.5 1.9 0.7 0.6 2.0 0.6 0.6 1.9 0.7 0.7 7.3 2.0 2.6 1.9 0.7 0.7 1.9 0.7 0.7 1.9 0.7 0.7 1.9 0.7 0.7 7.7 2.6 2.8 7.7 2.6 2.8 FY Ended 12/31/10 1QA Ended 03/31/11 2QA Ended 06/30/11 3QA Ended 09/30/11 4QE Ended 12/31/11 FY Ended 12/31/11 1QE Ended 03/31/12 2QE Ended 06/30/12 3QE Ended 09/30/12 4QE Ended 12/31/12 Projected FY Ended 12/31/12 12/31/13 LTM 09/30/11
Exhibit 106: James River Coal Financial model

James River Coal Company
FINANCIAL SUMMARY US$ (millions) COVERAGE & LEVERAGE EBITDA / Total Interest Debt / EBITDA SUMMARY BALANCE SHEET Cash and Marketable Securities Receivables Inventory Other Current Assets Current Assets Net Plant and Equipment Goodwill Deferred taxes & Other Assets Total Assets Short-Term and Current Debt Payables Accrued Expenses Other Current Liabilities Current Liabilities Senior Secured Debt Senior Debt Senior Subordinated Debt Junior and Convertible Debt Non-Recourse Debt Long-Term Debt Other Long Term Liabilities Preferred Stock at Liquidation Value Total Equity less Preferred Stock Total Liabilities & Equity 180 60 37 12 289 386 26 83 785 0 57 8 33 98 0 284 0 0 0 284 155 0 247 785 553 48 49 12 663 390 26 345 1,424 0 46 8 37 91 0 722 0 0 0 722 158 0 452 1,424 205 138 66 21 430 890 26 82 1,428 0 126 13 42 182 0 575 0 0 0 575 218 0 453 1,428 209 83 57 16 365 898 26 92 1,381 0 69 16 48 134 0 579 0 0 0 579 217 0 451 1,381 203 66 82 16 368 911 26 101 1,406 0 92 16 48 157 0 275 0 307 0 582 217 0 450 1,406 203 66 82 16 368 911 26 101 1,406 0 92 16 48 157 0 275 0 307 0 582 217 0 450 1,406 190 64 80 16 350 909 26 100 1,385 0 89 16 48 153 0 275 0 311 0 586 217 0 430 1,385 178 64 80 16 337 907 26 98 1,369 0 89 16 48 153 0 275 0 314 0 589 217 0 409 1,369 165 63 79 16 323 905 26 97 1,351 0 88 16 48 153 0 275 0 318 0 593 217 0 388 1,351 150 62 78 16 305 903 26 95 1,330 0 87 16 48 151 0 275 0 321 0 596 217 0 366 1,330 150 62 78 16 305 903 26 95 1,330 0 87 16 48 151 0 275 0 321 0 596 217 0 366 1,330 67 61 76 16 221 896 26 89 1,233 0 85 16 48 150 0 275 0 335 0 610 217 0 255 1,233 209 83 57 16 365 898 26 92 1,381 0 69 16 48 134 0 579 0 0 0 579 217 0 451 1,381 5.0 1.9 2.8 8.3 3.2 2.9 2.3 4.8 2.9 3.5 3.1 4.1 1.6 6.6 1.6 6.7 1.6 6.7 1.4 7.5 1.5 6.9 1.1 10.0 2.9 4.5 12/31/10 1QA Ended 03/31/11 2QA Ended 06/30/11 3QA Ended 09/30/11 4QE Ended 12/31/11 FY Ended 12/31/11 1QE Ended 03/31/12 2QE Ended 06/30/12 3QE Ended 09/30/12 4QE Ended 12/31/12 Projected FY Ended 12/31/12 12/31/13 LTM 09/30/11
95
December 13, 2011
High Yield
US Steel: Choppy margins and high fixed costs leave us cautious for 2012
Exhibit 107: US Steels security
GS TKR X Rating U Size (MM) $600 Coupon (%) 7.375 Priority Sr Nts Maturity 01-Apr-20 Agency Ratings Ba2/BB Price MW Next Call Date Bid Price 97.00 YTW (%) 7.870 ZSPRD (bp) 607
Tough steel market in 2012 portends more downside than upside in the bonds
We stayed on the sidelines with our In-Line rating on X in 2011 because, while operating results were pressured, it has $1.6 billion of revolver capacity and no restrictive credit facility covenants. We still do not foresee a credit event for X in 2012. However, at a yield of 7.9%, we see more downside than upside for the bonds. We do not expect a company with 3.5x leverage, European steel exposure, and significant cash use for working capital to trade in the 7.08.0% range this year. On the other hand, we see potential for widening to a level more in line with AKS (around 9%) if the steel market and Xs results are weaker than expected. We think this would be especially true if Xs European results disappoint, as AKS has no European operations.

Key risks to our view are higher steel prices, an improvement in European steel market conditions, and an early 2012 liquidity raise, which could make the market broadly more positive on US Steels credit quality.
Recent developments
US Steel gave a weak outlook for its 4Q results when it reported 3Q results in October. Results for the European segment should be especially weak in the fourth quarter owing to costs and lower demand. X had $270 million of cash at the end of the third quarter, and we expect it to draw down on its revolver by $200 million in the fourth quarter in order to fund operations.
Company description
US Steel is a large integrated steel mill with flat-rolled and tubular operations in the US and flat-rolled operations in Eastern Europe.
96
December 13, 2011
High Yield
Exhibit 108: US Steel Financial model

US Steel Corporation
FINANCIAL SUMMARY US$ (millions) OPERATING STATISTICS Domestic Flat-rolled shipments Tubular shipments USSE shipments INCOME STATEMENT Total Revenues Cost of Sales Gross Profit Gross Margin Selling General & Administrative EBITDA EBITDA Margin Depreciation and Amortization Operating Income Other Income, net Net Interest Expense Pretax Income Income Taxes Minority Interest & Equity In Subsidiaries Net Income CASH FLOW EBITDA EBITDA Margin Operating Cash Flow Before Working Capital Change in Working Capital Capital Expenditures Acquisitions Asset Sales Equity Issuance Debt Issuance Debt Redemptions Dividends, Distributions, and Share Repurchases Other CHANGE IN CASH 505 2.9% (1,114) (593) (676) 0 169 5 776 (417) (29) (89) (1,968) 63 1.3% 116 (99) (180) 0 12 4 240 (244) (7) 1 (157) 433 8.5% 287 (266) (221) 0 4 0 1,033 (870) (7) 11 (29) 340 6.7% 180 (110) (225) 0 0 0 2,118 (2,067) (8) (10) (122) 101 2.2% 36 (15) (230) 0 0 0 400 (203) (7) 0 (20) 937 4.8% 619 (490) (856) 0 16 4 3,791 (3,384) (29) 2 (328) 215 4.5% 122 88 (213) 0 0 0 0 (3) (7) 0 (13) 498 9.7% 312 60 (213) 0 0 0 0 (3) (7) 0 149 286 5.7% 171 99 (213) 0 0 0 0 (4) (7) 0 47 153 3.2% 82 (64) (213) 0 0 0 0 (4) (7) 0 (206) 1,153 5.9% 687 183 (850) 0 1 0 0 (14) (29) 0 (21) 1,504 7.2% 928 172 (850) 0 0 0 300 (315) (29) 0 206 859 4.4% 654 (447) (876) 0 82 6 3,473 (3,196) (29) (40) (373) 17,374 (16,259) 1,115 6.4% (610) 505 2.9% (658) (153) 42 (274) (385) (97) 0 (482) 4,864 (4,621) 243 5.0% (180) 63 1.3% (169) (106) 86 (50) (70) (16) 0 (86) 5,120 (4,498) 622 12.1% (189) 433 8.5% (171) 262 73 (48) 287 (65) 0 222 5,081 (4,560) 521 10.3% (181) 340 6.7% (172) 168 (75) (38) 55 (33) 0 22 4,599 (4,326) 1 0.0% (173) 101 2.2% (168) (67) 0 (53) (120) (12) 0 (132) 19,664 (18,005) 1,659 8.4% (723) 937 4.8% (680) 257 84 (189) 152 (126) 0 26 4,784 (4,392) 391 8.2% (176) 215 4.5% (170) 46 0 (53) (7) 2 0 (5) 5,121 (4,445) 675 13.2% (177) 498 9.7% (171) 327 0 (53) 274 (90) 0 184 5,014 (4,543) 470 9.4% (184) 286 5.7% (172) 115 0 (52) 62 (21) 0 42 4,778 (4,446) 332 7.0% (179) 153 3.2% (173) (20) 0 (52) (72) 24 0 (48) 19,696 (17,826) 1,869 9.5% (716) 1,153 5.9% (685) 468 0 (211) 257 (85) 0 172 20,835 (18,570) 2,265 10.9% (762) 1,504 7.2% (701) 803 0 (211) 592 (195) 0 397 19,365 (17,794) 1,571 8.1% (712) 859 4.4% (680) 179 155 (270) 64 (155) 0 (91) 15.30 1.55 5.46 3.95 0.43 1.45 3.94 0.42 1.14 3.84 0.48 1.20 3.80 0.50 1.10 15.53 1.83 4.88 3.85 0.50 1.15 3.85 0.50 1.20 4.00 0.50 1.25 3.95 0.50 1.15 15.65 1.99 4.75 16.40 2.00 5.40 12/31/10 1QA Ended 03/31/11 2QA Ended 06/30/11 3QA Ended 09/30/11 4QE Ended 12/31/11 FY Ended 12/31/11 1QE Ended 03/31/12 2QE Ended 06/30/12 3QE Ended 09/30/12 4QE Ended 12/31/12 Projected FY Ended 12/31/12 12/31/13 LTM 09/30/11
Exhibit 109: US Steel Financial model

US Steel Corporation
FINANCIAL SUMMARY US$ (millions) COVERAGE & LEVERAGE EBITDA / Total Interest Debt / EBITDA SUMMARY BALANCE SHEET Cash and Marketable Securities Receivables Inventory Other Current Assets Current Assets Net Plant and Equipment Goodwill Deferred taxes & Other Assets Total Assets Short-Term and Current Debt Payables Accrued Expenses Other Current Liabilities Current Liabilities Senior Secured Debt Senior Debt Senior Subordinated Debt Junior and Convertible Debt Non-Recourse Debt Long-Term Debt Other Long Term Liabilities Preferred Stock at Liquidation Value Total Equity less Preferred Stock Total Liabilities & Equity 578 2,023 2,352 351 5,304 6,486 1,760 1,800 15,350 216 1,804 938 189 3,147 376 2,278 0 863 0 3,517 4,835 0 3,851 15,350 421 2,596 2,255 265 5,537 6,627 1,787 1,817 15,768 217 2,127 952 227 3,523 377 2,278 0 863 0 3,518 4,819 0 3,908 15,768 393 2,695 2,698 235 6,021 6,736 1,794 1,694 16,245 217 2,153 1,001 228 3,599 543 2,278 0 863 0 3,684 4,747 0 4,215 16,245 270 2,602 2,843 219 5,934 6,588 2,013 1,396 15,931 217 2,161 1,005 330 3,713 500 2,278 0 863 0 3,641 4,408 0 4,169 15,931 250 2,549 2,549 219 5,568 6,650 2,013 1,946 16,177 14 1,800 1,005 330 3,148 987 2,191 0 863 0 4,041 4,408 0 4,580 16,177 250 2,549 2,549 219 5,568 6,650 2,013 1,946 16,177 14 1,800 1,005 330 3,148 987 2,191 0 863 0 4,041 4,408 0 4,580 16,177 238 2,605 2,605 219 5,666 6,693 2,013 1,989 16,360 15 1,998 1,005 330 3,347 984 2,191 0 863 0 4,038 4,408 0 4,568 16,360 387 2,645 2,645 219 5,896 6,735 2,013 2,031 16,674 315 2,138 1,005 330 3,789 980 1,891 0 863 0 3,734 4,408 0 4,744 16,674 434 2,561 2,561 219 5,775 6,776 2,013 2,074 16,637 315 2,071 1,005 330 3,721 976 1,891 0 863 0 3,730 4,408 0 4,779 16,637 228 2,545 2,545 219 5,537 6,815 2,013 2,116 16,481 315 1,973 1,005 330 3,623 972 1,891 0 863 0 3,726 4,408 0 4,723 16,481 228 2,545 2,545 219 5,537 6,815 2,013 2,116 16,481 315 1,973 1,005 330 3,623 972 1,891 0 863 0 3,726 4,408 0 4,723 16,481 434 2,548 2,548 219 5,749 6,964 2,013 2,286 17,012 15 2,151 1,005 330 3,501 957 2,191 0 863 0 4,011 4,408 0 5,091 17,012 270 2,602 2,843 219 5,934 6,588 2,013 1,396 15,931 217 2,161 1,005 330 3,713 500 2,278 0 863 0 3,641 4,408 0 4,169 15,931 1.8 7.4 1.3 14.8 9.0 2.3 8.9 2.8 1.9 10.1 5.0 4.3 4.1 4.7 9.4 2.0 5.5 3.5 2.9 6.6 5.5 3.5 7.1 2.7 3.2 4.5 12/31/10 1QA Ended 03/31/11 2QA Ended 06/30/11 3QA Ended 09/30/11 4QE Ended 12/31/11 FY Ended 12/31/11 1QE Ended 03/31/12 2QE Ended 06/30/12 3QE Ended 09/30/12 4QE Ended 12/31/12 Projected FY Ended 12/31/12 12/31/13 LTM 09/30/11
97
December 13, 2011
High Yield
Packaging & Containers: Coverage view and recommendations

Joe Stivaletti Goldman, Sachs & Co. joe.stivaletti@gs.com 1-212-902-3299 James Kitchell Goldman, Sachs & Co. james.kitchell@gs.com 1-212-902-9813 We have raised our coverage view for the high yield packaging and containers sector to Attractive from Neutral. We favor this sector versus the paper and forest products sector for several key reasons. First, the packaging and container industry is, in general, recession resistant. Products manufactured by these companies include packages for beverages, food, and household products. In good economic times and in bad economic times, consumers need to buy these products. As such, while not immune to economic pressures, packaging and container manufacturers tend to see less pressure on volumes in periods of economic weakness than companies in many other manufacturing industries. Against a backdrop of sluggish global economic growth, we like exposure to the packaging and container industry going into 2012. Second, most packaging and container companies have been successful in passing along higher input costs in the form of higher selling prices. In many cases, contracts provide for direct cost pass-throughs within 30-90 days. For instance, plastic container manufacturer Plastipak rarely sees significant pressure on operating results as a result of cost inflation, as it has shown an ability to pass higher costs along to customers in the form of higher selling prices on a real time basis. Berry Plastics tends to see short-term pressure on margins, as its cost pass-throughs are not as quick and do not cover as much of its production base as in the case of a company like Plastipak. At the other end of the spectrum is Solo Cup, where cost pass-through mechanisms are not material, and where a lack of selling price hikes has led to significant margin pressure during the past two years. Third, industry behavior is generally quite rational in terms of price competition. In recent years, most packaging and container companies have chosen not to compete solely on price, and have not generally tried to trade price for volume. We attribute this more rational behavior to ongoing global industry consolidation in glass, metal, and plastic packaging, and numerous examples of aggressive pricing strategies in the past that hurt profitability levels as opposed to helping them. The metal container industry, for example, was plagued by irrational price competition in the 1990s, but very rational behavior in recent years has allowed for relatively steady margins among producers. In general, manufacturers have become more focused on competing based on customer service and product innovation, and have looked to enhance profitability through ongoing manufacturing efficiency initiatives and synergy realization. Not only do we like the underlying fundamentals of the packaging and container industry, but also we see opportunities to invest in credits whose bonds offer high yields and where we see catalysts to drive spread tightening. Our two best ideas in the space are Berry Plastics second lien bonds and Reynolds Group senior unsecured paper. In both cases, we look for deleveraging to drive outperformance in the year ahead.
98
December 13, 2011
High Yield
Berry Plastics: Second lien bonds offer high yield; deleveraging expected to continue in 2012
GS TKR BERRY BERRY BERRY Rating IL OP IL Size (MM) $370 $800 $168 Coupon (%) 8.250 9.750 10.250 Priority Maturity Agency Ratings B1/B Caa1/CCC Caa2/CCC Next Call Price Date Bid Price YTW (%) 6.054 9.917 11.463 STW (bp) 584 807 1,080
Sr Sec Nts 15-Nov-15 Sr Sec Nts 15-Jan-21 Sr Sub Nts 01-Mar-16
104.125 15-Nov-12 105.750 104.875 15-Jan-16 105.125 Current 99.000 96.000

We rate the Berry Plastics 9.75% second lien notes Outperform; they currently yield approximately 9.9%. We believe these securities will outperform during the year ahead as EBITDA grows and net leverage falls to a more comfortable level. We expect 2012 EBITDA to benefit from selling price increases tied to higher 2011 input costs, recent acquisitions and related synergies, and managements continued focus on manufacturing efficiencies. In terms of risks to our positive view, we see the willingness of Berrys sponsor to make debt-financed acquisitions as a key risk worth noting. However, management has stated a goal of delevering the credit and considering an IPO within the next two years, and it intends for future acquisitions to be deleveraging.

While results in early fiscal 2011 were weak as a result of significant cost inflation, particularly for plastic resins, Berry showed impressive sequential improvement in quarterly EBITDA as it eventually passed along higher costs in the form of higher selling prices, most notably in the back half of the fiscal year, which ended on October 1, 2011. Fiscal 2011 EBITDA came in at approximately $655 million, up 21%. This improvement was also the result of past acquisitions and related synergies, as well as managements ongoing productivity initiatives. Impressively, Berry was able to lower its net leverage to approximately 6.4x by the end of fiscal 2011, from a recent peak of 7.7x nine months earlier. (The 6.4x net leverage figure reflects a full years worth of EBITDA from acquisitions that were completed in fiscal 2011.) In fiscal 2012, we look for Berry to report EBITDA of $760 million, with the improvement again being driven by selling price increases that outpace cost inflation, past acquisitions, synergies, and productivity initiatives. Management is making good progress in shortening contractual lags in cost pass-throughs, which bodes well for the future. We expect Berry to generate $195 million of free cash flow in fiscal 2012, leading to year-end net leverage of 5.7x.
Company description
Berry Plastics is a leading manufacturer of plastic packaging products, plastic film products, specialty adhesives, and coated products. Rigid plastic products include food containers, drink cups, bottles, closures, overcaps, tubes, and prescription vials. Berrys flexible
December 13, 2011
High Yield
products include trash bags, stretch films, plastic sheeting, and tapes. The company sells its packaging products to customers in a wide variety of end markets, including food and beverage, personal care, agricultural, institutional, industrial, construction, aerospace, and automotive. Over time, Berry has achieved leading competitive positions in many of its major product lines, including thinwall, pry-off, dairy and clear polypropylene containers; drink cups; spice and pharmaceutical bottles and prescription vials; spirits, continuous thread, and pharmaceutical closures; aerosol overcaps and plastic squeeze tubes; plastic trash bags, stretch film and plastic sheeting; and cloth and foil tape products and adhesives. Berry is currently majority-owned by affiliates of Apollo Management and Graham Partners. The companys senior management team and other employees also own a portion of the company. Exhibit 111: Berry Plastics Corporation Financial model
($, millions) Net sales EBITDA Interest expense Capital expenditures Cash Total debt Net debt EBITDA margin EBITDA/interest Net debt/EBITDA FY:08 9/27/2008 3,513 435 237 162 190 3,600 3,410 12.4% 1.8x 7.6x FY:09 9/26/2009 3,187 490 224 194 10 3,360 3,350 15.4% 2.2x 6.8x 1Q:10 1/2/2010 880 117 65 62 22 4,063 4,041 13.2% 1.8x 6.8x 2Q:10 4/3/2010 1,056 138 66 67 23 4,159 4,135 13.0% 2.1x 7.0x 3Q:10 7/3/2010 1,168 133 74 42 187 4,430 4,243 11.4% 1.8x 7.5x 4Q:10 10/2/2010 1,154 153 77 52 148 4,374 4,226 13.2% 2.0x 7.6x FY:10 10/2/2010 4,257 541 282 223 148 4,374 4,226 12.7% 1.9x 7.6x 1Q:11 1/1/2011 1,041 135 75 46 120 4,410 4,290 13.0% 1.8x 7.7x 2Q:11 4/2/2011 1,104 157 76 48 126 4,417 4,291 14.2% 2.1x 7.4x 3Q:11 7/2/2011 1,187 177 78 32 171 4,412 4,241 14.9% 2.3x 6.8x 4Q:11E 10/1/2011 1,229 186 76 59 42 4,584 4,542 15.2% 2.5x 6.4x FY:11E 10/1/2011 4,561 655 305 185 42 4,584 4,542 14.4% 2.1x 6.4x FY:12E 9/29/2012 5,092 760 310 200 42 4,389 4,347 14.9% 2.5x 5.7x
Reynolds Group: Leverage is expected to decline as acquisition synergies are realized

GS TKR REYNOL REYNOL Rating IL OP Size (MM) $1,500 $1,500 Coupon (%) 7.125 9.000 Priority Sr Sec Nts Sr Nts Maturity 04/15/19 04/15/19 Agency Ratings Ba3/BBCaa1/BNext Call Price 103.563 104.500 Date 10/15/14 10/15/14 Bid Price 100.000 94.000 YTW (%) 7.122 10.176 STW (bp) 629 867

We rate the Reynolds 9.0% senior notes Outperform; they currently yield approximately 10.2%. Reynolds operates in a recession-resistant industry, and benefits from strong diversification in terms of both products and geography. Over the next year, we expect relatively steady underlying profitability to be enhanced by the realization of significant synergies related to several major acquisitions that Reynolds completed during the past
100
December 13, 2011
High Yield
year. As total EBITDA improves, we expect leverage to fall from current high levels, and we believe the senior notes will react positively. Risks to our positive view include potential problems in combining and operating the businesses that Reynolds has acquired or in realizing anticipated synergies. Further, management has shown a willingness to incur debt and increase leverage to make acquisitions. We see future acquisitions as likely, and higher sustained leverage than we are expecting would be a negative for the bonds.

During the past year, Reynolds completed the acquisitions of Pactiv, Dopaco, and Graham Packaging for a total cost of over $11 billion. Related increases in debt led to pro forma net leverage (not including unrealized synergies) of 6.8x as of September 30, 2011. Management expects synergies tied to these acquisitions to total over $325 million, and reports that it is ahead of plan regarding the achievement of these synergies. Versus pro forma EBITDA of $2.439 billion in 2010, we expect Reynolds to generate pro forma EBITDA of $2.573 billion in 2011 and $2.719 billion in 2012, leading net leverage to decline to 6.6x by the end of 2011 and 6.2x by the end of 2012. In addition to having a recession-resistant business model and strong market positions, Reynolds benefits from favorable raw material input cost pass-through arrangements for many of the products it sells. In areas where the companys sales contracts do not provide for such arrangements, Reynoldss strong market positions have generally allowed the company to raise selling prices when necessary, and maintain or improve its EBITDA margin levels over time.
Company description
Reynolds is a major international producer of consumer packaging products. During the past five years, owner Graeme Hart built Reynolds by acquiring numerous assets in the packaging industry including International Papers beverage packaging division, SIG Combibloc, Blue Ridge Paper Products, Alcoas packaging and consumer businesses (including the Reynolds brand product lines), Pactiv Corporation, Dopaco, and Graham Packaging. Major products manufactured by Reynolds include aseptic packaging for beverages and liquid food products, fresh carton paperboard packaging for beverage products, closures, branded and private label foils, wraps, bags, cups, foodservice and food packaging products, and plastic containers for branded consumer products.
101
December 13, 2011
High Yield
Exhibit 113: Reynolds Group Holdings Limited Financial model

Three Months Ended ($, millions) Revenue EBITDA Interest expense Capital expenditures Cash Total debt Net debt EBITDA margin EBITDA/interest Net debt/EBITDA Actual 9/30/2010 1,612 310 124 78 451 6,119 5,668 19.2% 2.5x 4.9x Actual 12/31/2010 2,177 432 185 134 652 12,143 11,491 19.8% 2.3x 6.3x Actual 3/31/2011 2,368 417 218 105 1,182 12,782 11,600 17.6% 1.9x 6.2x Actual 6/30/2011 2,843 476 206 116 584 12,840 12,256 16.7% 2.3x 6.4x Actual 9/30/2011 3,069 563 243 125 1,037 18,079 17,042 18.4% 2.3x 6.8x Actual 12/31/2008 6,013 785 360 288 383 4,975 4,592 13.1% 2.2x 5.6x Full Year Ended Actual 12/31/2009 5,910 1,130 305 292 514 5,131 4,617 19.1% 3.7x 4.1x Actual 12/31/2010 6,774 1,251 496 337 652 12,143 11,491 18.5% 2.5x 6.3x Forecast 12/31/2011 11,984 2,166 1,002 547 538 17,605 17,068 18.1% 2.2x 6.6x Forecast 12/31/2012 14,552 2,719 1,320 700 500 17,355 16,855 18.7% 2.1x 6.2x
102
December 13, 2011
High Yield
Paper & Forest Products: Coverage view and recommendations

Joe Stivaletti Goldman, Sachs & Co. joe.stivaletti@gs.com 1-212-902-3299 James Kitchell Goldman, Sachs & Co. james.kitchell@gs.com 1-212-902-9813 We have lowered our coverage view for the high yield paper and forest products sector to Cautious from Neutral. We recommend that investors focus more attention on opportunities in the packaging and containers sector rather than the paper and forest products space. Although there are some bright spots, the paper and forest products industry continues to face many challenges and be overshadowed by an uncertain demand picture for many key products. There are four key issues that concern us. First, demand for most paper and forest products is cyclical, and weak economic conditions are pressuring volumes. For example, retailers send out fewer catalogs and advertise less when the economy is soft, hurting printing and writing paper manufacturers. Weak housing markets have led to low demand for lumber and other building products, and we see no light at the end of the tunnel. High unemployment negatively affects uncoated freesheet volumes. Second, secular demand trends are negative for a number of key paper commodities, and the pace of decline is extremely difficult to forecast. The North American newsprint industry is less than half the size it was 10 years ago. Coated and uncoated printing and writing papers continue to lose volume as e-readers proliferate. Making decisions about investments in companies producing these products is very challenging given the uncertain outlook. Third, cost inflation is a real problem. The prices these manufacturers are paying for energy, chemicals, and recycled fiber are elevated. Although some costs have recently come down from their highs, we expect costs overall to remain above historical averages. While selling prices have improved for some paper commodities, higher costs have provided a significant offset in most cases. Fourth, the Canadian dollar remains quite strong relative to the US dollar. This has severely damaged the profitability of some Canadian-based producers that sell products based in US dollars.
Louisiana-Pacific: Rated Underperform owing to very low yield

GS TKR LPX Rating U Size (MM) $244 Coupon (%) 13.000 Priority Sr Sec Nts Maturity 15-Mar-17 Agency Ratings Ba3/BBBNext Call Price 106.500 Date 03/15/13 Bid Price 98.500 YTW (%) 5.235 STW (bp) 511

We rate the Louisiana-Pacific (LPX) 13.0% senior secured notes Underperform. LPX makes building products, for which demand is very depressed owing to the low level of domestic housing starts. As such, LPX is free cash flow negative. We believe that, at some point, demand for LPXs products will recover and the company will generate strong free cash flow but we do not expect that to happen in 2012. Although we project LPX will be a net
December 13, 2011
High Yield
user of cash through 2012 at least, we note that the company is in a net cash position and we expect it to remain so. We do not anticipate any liquidity problems, and we expect the company to refinance the bonds close to the first call date of March 15, 2013. Nevertheless, we rate LPX Underperform because we believe the yield to worst on these bonds of just 5.2% will cause the securities to underperform during the year ahead. A risk to our Underperform rating is the possibility that management leaves the bonds outstanding considerably longer than the first call date, which would generate a higher yield. Additionally, a major near-term recovery in residential construction could cause earnings to rebound significantly and result in stronger relative performance by the bonds versus our expectations.

Owing to weak demand and prices for the wood-based building products it manufactures, LPXs operating results have been depressed. LTM EBITDA as of September 30, 2011, was just $8.6 million. For the full years 2011 and 2012, we look for EBITDA of $14.9 million and $27.5 million, respectively. This would result in the company generating negative free cash flow in both years. As of September 30, 2011, LPX had cash and investments of $375.1 million, which exceeded total recourse debt of $257.3 million. Our forecast shows cash and investments providing LPX with strong liquidity through 2012; we estimate cash and investments of $346.8 million as of the end of 2012.
Company description
LPX is the largest producer of oriented strand board (OSB) in North America, and is a leading producer of siding and engineered wood products (EWP). LPX owns 21 facilities in the US and Canada, two facilities in Chile, and one facility in Brazil. The company also operates three facilities through joint ventures, and participates in a joint venture that produces cellulose insulation. LPXs products are primarily used in new home construction, repair and remodeling, and manufactured housing. LPXs primary product is OSB. OSB is a structural wood panel product made from wood strands arranged in layers and bonded with resin. It is used for many of the same purposes as plywood, including roof decking, sidewall sheathing, and floor underlayment. Exhibit 115: Louisiana-Pacific Corporation Financial model
Three Months Ended ($, millions) Net sales EBITDA Interest expense Capital expenditures Cash and investments Total recourse debt Net cash and investments (debt) EBITDA margin EBITDA/interest Debt/EBITDA Actual 9/30/2010 322.8 6.1 15.3 7.1 434.4 243.3 191.1 1.9% 0.4x 4.5x Actual 12/31/2010 316.3 0.1 14.1 2.0 435.8 245.2 190.6 0.0% 0.0x 3.2x Actual 3/31/2011 331.7 7.9 14.0 2.4 362.9 246.7 116.2 2.4% 0.6x 2.9x Actual 6/30/2011 362.4 (1.5) 14.4 5.6 368.3 254.7 113.6 NM NM 20.2x Actual 9/30/2011 350.6 2.1 14.2 5.4 375.1 257.3 117.8 0.6% 0.1x 29.9x Actual 12/31/2008 1,379.2 (170.4) 61.2 99.4 215.1 299.4 (84.3) NM NM NM Full Year Ended Actual 12/31/2009 1,061.0 (54.2) 74.6 9.6 439.6 308.8 130.8 NM NM NM Actual 12/31/2010 1,383.6 76.9 63.9 14.5 435.8 245.2 190.6 5.6% 1.2x 3.2x Forecast 12/31/2011 1,382.4 14.9 55.6 20.0 385.3 258.8 126.5 1.1% 0.3x 17.3x Forecast 12/31/2012 1,392.6 27.5 50.0 25.0 346.8 264.8 82.0 2.0% 0.5x 9.6x
104
December 13, 2011
High Yield
Rental services: Coverage view and recommendations

You can rent but dont own
Franklin Jarman Goldman, Sachs & Co. franklin.jarman@gs.com 1-212-902-7537 Karl Blunden Goldman, Sachs & Co. Karl.blunden@gs.com 1-212-357-2769 We recently revised our Rental Services coverage view to Cautious from Neutral to reflect our belief that (1) sector valuations carry limited upside, (2) the car rental companies remain highly reliant upon capital markets availability, and (3) economic weakness, especially in Europe, could reduce demand for car and equipment rentals. From a valuation perspective, the Rental Services sector is one of the tightest trading sectors in the high yield universe and currently trades at 7.1% YTW on average or 150 bp inside the broad high yield index. We believe that even the high quality credits within this sector will need a multi-year runway to achieve investment grade ratings, if at all. The car rental sector remains highly reliant upon the capital markets to refinance upcoming asset-backed maturities in both the US and internationally. While US markets have recovered from the 2008 US credit crisis, international ABS markets remain challenged. We think further stress to the global markets could complicate both Hertz and Avis Budgets long-term international vehicle financing plans. Both equipment and car rental profitability is closely tied to economic growth prospects, which drive industry volumes and pricing. With the risk of slower growth in Europe (as well as the US), we believe investors would be better served to seek value in other less cyclical sectors trading at a greater discount to fair value. Despite rich sector valuations, we think one bright spot remains the domestic growth opportunity for equipment rental companies. A decline in private lending to small-medium businesses has enabled the larger equipment rental companies to outgrow their smaller private competitors over the past year. Renting equipment (versus owning) has also become a more viable option for small contractors due to their limited access to capital. We think this trend should continue to constrain broader industry fleet growth (supporting pricing) enabling larger rental companies like URI and RSC to gain additional market share. Exhibit 116: HY Rental Services relative value summary
RSC Ranking Rating GS Rating Amount Coupon Maturity Price ($) YTW STW Leverage Thru Sec Gross Leverage Net Leverage Yield per Leverage Unsec Caa1/BIL 200 10.25% 11/15/19 107.50 8.6% +772 4.5x 4.5x 4.4x 1.9% RSC Unsec Caa1/BIL 648 8.25% 2/1/21 99.25 8.4% +749 4.5x 4.5x 4.4x 1.9% URI Sr Unsec IL 500 9.25% 12/15/19 110.00 6.9% +656 2.4x 3.7x 3.7x 2.9% URI Sr Sub OP 750 8.375% 9/15/20 102.00 8.0% +710 3.7x 3.7x 3.7x 2.2% HTZ Sr Unsec B2/BNR 1000 6.75% 4/15/19 99.50 6.8% +596 3.3x 3.7x 3.4x 2.0% HTZ Sr Unsec B1/B+ NR 500 7.375% 1/15/21 101.00 7.2% +631 3.3x 3.7x 3.4x 2.2% CAR Sr Unsec B3/B NR 450 9.625% 3/15/18 104.00 8.5% +812 4.2x 4.2x 2.5x 2.0% CAR Sr Unsec B2/B U 600 8.25% 1/15/19 99.44 8.4% +747 4.2x 4.2x 2.5x 2.0%
B3/B Caa1/CCC+
105
December 13, 2011
High Yield
Avis Budget: Underperform reflects hybrid cyclical/financial risk

Exhibit 117: Avis Budget benchmark security & CDS
Ticker CAR CAR CDS GS Rating U Credit B2/B Amt. 599 Coupon 8.250% Ranking Sr. Nts Maturity 15-Jan-19 5 year Price 99.00 9.75 pts YTW 8.4% STW 681
The Avis Budget 8.25% senior notes due 2019 are our top pan in the Rental Services sector for 2012. Our Underperform rating reflects our view that (1) the bonds trade rich from a relative value perspective, (2) 2012 consensus expectations are too high for the company, (3) the Avis Europe integration could prove challenging in the current environment, and (4) Avis Budget is still highly depending upon capital markets availability which could drive higher volatility in downside macro scenarios. With Avis Budget now supporting gross leverage of 4.2x and its 8.25% senior notes trading at 8.4% YTW ($99.0), or roughly in line with the high yield index, we believe that the bonds are trading rich on a relative basis. We think a confluence of the risk factors highlighted above could drive the credit to trade as much as 150-200 bp behind the HY Index implying 7-10 points of downside from current levels and comparable to where the credit traded at recent lows in 3Q2011. Key risks to our thesis include the potential for stronger residual value prices, an improved European operating environment and stable capital markets.

With its acquisition of Avis Europe, Avis Budget has laid out a framework to generate $30 million in acquisition synergies and is guiding for flat to up 1% pricing and volume growth across the region. We estimate Europe will represent over 30% of the companys pro forma revenues and believe weaker economic growth in that region could make it difficult for the company to achieve these targeted acquisition synergies. Residual value growth has been a strong driver behind Avis Budgets corporate EBITDA growth profile over the past two years. Fleet depreciation has declined over 25% from $1.7 billion in 2008 to $1.2 billion in 2011 thanks to the higher residual values. Looking forward, we believe there is downside risk to the residual value growth opportunity, which is currently trending at record high levels. At a minimum, we believe the fleet depreciation expense declines will flatten and could increase as much as 5%. Avis Budget remains highly reliant upon accessing the ABS market at reasonable rates. The company has $3.1 billion of ABS maturities over the next two years. Given the lack of visibility into the highly volatile capital markets, we believe the companys elevated reliance upon financing could exacerbate its credit weakness in most downside macro scenarios. Finally, travel trends have recently weakened with October 2011 domestic enplanements down 1.1% after increasing 1.8% yoy on average for the full year. We believe any weakness in global growth could weigh on car rental volume growth and lead to further pricing headwinds.
106
December 13, 2011
High Yield

Avis Budget recently reported solid 3Q results suggesting that travel volumes have so far been relatively resilient in an uncertain environment. Rental volumes increased 5% in 3Q although pricing declined by 1%. The company also benefited from cost reductions thanks to its constrained SG&A and lower fleet depreciation costs (down 14% yoy). Looking ahead, Avis Budget guided for 4Q domestic car rental volumes to increase 4-6% yoy and for domestic per-unit vehicle depreciation costs to decline 3-5% yoy. For 2012, we expect slower volumes and continued pricing pressure to weigh on revenue growth. We also think Avis Budget will be up against difficult yoy fleet depreciation comparisons, which could challenge incremental EBITDA growth. We are forecasting revenues to grow 25% to $7.0 billion (below consensus of $7.4 billion) and corporate EBITDA of $710 million (below consensus of $745 million).
Company description
Avis Budget Group (CAR) is a leading provider of vehicle rental services, including cars and trucks. The company has locations in more than 70 countries and employs over 30,000 people. The Avis brand operates approximately 2,100 locations, with 60% of the revenues generated from commercial customers. Aviss primary competitor is the Hertz brand, which derives a significant portion of its revenues from corporate accounts. On the leisure side, Budget has about 1,900 locations, with 72% of its revenue generated from leisure accounts. Together, Avis Budget controls 20% of the car rental market. On October 3, 2011, Avis Budget announced the completion of its acquisition of Avis Europe PLC for an equity purchase price of approximately $1.0 billion.
107
December 13, 2011
High Yield
Exhibit 118: Avis Budget Financial model

Income Statement ($, mn) Total Revenues YoY Change
Gross EBITDA Gross EBITDA Margin Adjusted Corporate EBITDA Adj. Corp. EBITDA Margin Corporate Interest Expense Cash Flow Adjusted Corporate EBITDA Cash Interest Cash Taxes Change in Working Capital Other Corporate Operating Cash Flow Capital Spending Dividends Corporate Free Cash Flow Vehicle Program Cash Flows Acquisitions/Divestitures Share Issuance/Repurchase Debt issuance/repurchase Other Cash Flow Items Change in cash Balance Sheet Cash & Equivalents Bank Debt Corporate debt Fleet Debt Total Debt (fleet & corporate) Net debt (corporate) Net debt (fleet & corporate) Shareholders' Equity Credit Stats Debt/EBITDA (corporate) Net Debt/EBITDA (corporate) Debt/EBITDA (gross) Net Debt/EBITDA (gross) EV/EBITDA EBITDA/Interest Exp. (EBITDA-Capex)/Interest Exp. Debt/Capital Net debt/Capital FCF/Debt Market capitalization Enterprise Value FY08 FY09 1Q10 2Q10 3Q10 4Q10 FY10 1Q11 2Q11 3Q11 4Q11E FY11E FY12E LTM-3Q11
5,984.0 0.2%
1,878.0 31.4% 181.0 3.0% 129.0
5,132.8 -14.2%
1,643.8 32.0% 218.8 4.3% 153.0
1,152.8 -3.5%
335.8 29.1% 38.8 3.4% 41.0
1,294.0 -1.4%
437.0 33.8% 98.0 7.6% 41.0
1,512.0 3.1%
571.0 37.8% 219.0 14.5% 40.0
1,226.1 5.7%
353.1 28.8% 54.1 4.4% 48.0
5,184.9 1.0%
1,696.9 32.7% 409.9 7.9% 170.0
1,235.0 7.1%
359.0 29.1% 83.0 6.7% 47.0
1,412.0 9.1%
450.0 31.9% 191.0 13.5% 47.0
1,623.0 7.3%
576.0 35.5% 272.0 16.8% 48.0
1,290.1 5.2%
410.3 31.8% 114.2 8.9% 65.5
5,560.1 7.2%
1,795.3 32.3% 660.2 11.9% 207.5
6,963.3 25.2%
1,811.3 26.0% 710.3 10.2% 258.0
5,496.1 -1,738.1 31.6% 600.1 10.9% 190.0
181.0 (133.2) (13.0) 80.0 170.5 65.0 (88.0) 0.0 (23.0) 248.0 (66.0) (33.0) (10.0) (72.0) 44.0
218.8 (135.3) (20.0) 111.0 (24.3) 205.8 (39.0) 0.0 166.8 1,023.0 12.0 0.0 352.0 27.0 1,580.8
38.8 (0.7) (8.8) 5.0 (44.5) (10.2) (7.0) 0.0 (17.2) 34.0 6.0 0.0 (10.0) (25.0) (12.2)
98.0 (42.4) (8.8) (5.0) 0.0 44.0 (16.0) 0.0 28.0 (29.0) 2.0 0.0 (3.0) (10.0) (12.0)
219.0 (22.2) (8.8) 209.0 (74.0) 323.0 (16.0) 0.0 307.0 (150.0) 1.0 0.0 (33.0) 40.0 165.0
54.1 (35.3) (115.7) 30.0 0.0 6.1 (22.0) 0.0 (15.9) (68.0) 3.0 0.0 404.0 (35.0) 288.1
409.9 (100.7) (142.0) 239.0 (118.5) 362.9 (61.0) 0.0 301.9 (213.0) 12.0 0.0 358.0 (30.0) 428.9
83.0 (50.3) (8.8) (58.0) 6.1 (28.0) (8.0) 0.0 (36.0) 39.0 3.0 0.0 (2.0) (2.0) 2.0
191.0 (39.2) (8.8) (6.0) (70.1) 67.0 (9.0) 0.0 58.0 100.0 3.0 0.0 (3.0) (436.0) (278.0)
272.0 (50.3) (8.8) 96.0 (109.9) 199.0 (13.0) 0.0 186.0 201.0 3.0 0.0 (34.0) 11.0 367.0
114.2 (56.6) (8.8) (95.6) 0.0 (56.6) (10.0) 0.0 (66.6) 196.0 (1,040.0) 0.0 1,000.0 0.0 89.4
660.2 (196.4) (35.0) (63.6) (173.9) 182.4 (40.0) 0.0 142.4 341.0 (1,031.0) 0.0 961.0 (427.0) (13.6)
710.3 (249.0) (50.0) (152.0) 0.0 164.6 (50.0) 0.0 114.6 (699.0) 0.0 0.0 0.0 0.0 (584.5)
600.1 (175.1) (142.0) 62.0 (173.9) 244.1 (52.0) 0.0 192.1 272.0 12.0 0.0 365.0 (462.0) 379.1
258.0 789.0 1,789.0 6,034.0 7,823.0 1,531.0 7,565.0 93.0
482.0 786.0 2,131.0 4,374.0 6,505.0 1,649.0 6,023.0 222.0
470.0 337.0 2,126.0 4,635.0 6,761.0 1,656.0 6,291.0 226.0
458.0 334.0 2,123.0 5,968.0 8,091.0 1,665.0 7,633.0 225.0
623.0 339.0 2,128.0 5,277.0 7,405.0 1,505.0 6,782.0 373.0
911.0 286.0 2,502.0 4,515.0 7,017.0 1,591.0 6,106.0 410.0
911.0 286.0 2,502.0 4,515.0 7,017.0 1,591.0 6,106.0 410.0
913.0 283.0 2,499.0 5,111.0 7,610.0 1,586.0 6,697.0 438.0
645.0 282.0 2,498.0 6,287.0 8,785.0 1,853.0 8,140.0 532.0
1,002.0 281.0 2,498.0 6,133.0 8,631.0 1,496.0 7,629.0 552.0
1,091.4 1,281.0 3,498.0 6,133.0 9,631.0 2,406.6 8,539.6 568.0
1,091.4 1,281.0 3,498.0 6,133.0 9,631.0 2,406.6 8,539.6 568.0
506.9 1,281.0 3,498.0 6,133.0 9,631.0 2,991.1 9,124.1 789.5
1,002.0 778.0 2,498.0 6,133.0 8,631.0 1,496.0 7,629.0 552.0
9.9x 8.5x 4.2x 4.0x 8.7x 1.4x 0.7x 95% 94% -1.3% 45.8 1,576.8
9.7x 7.5x 4.0x 3.7x 12.7x 1.4x 1.2x 91% 88% 7.8% 1,125.3 2,774.3
8.2x 6.4x 4.2x 3.9x 10.9x 1.7x 0.8x 90% 88% 8.2% 1,178.5 2,834.5
7.1x 5.6x 5.0x 4.7x 9.9x 1.9x 2.0x 90% 88% 11.1% 1,300.2 2,965.2
5.8x 4.1x 4.4x 4.0x 8.1x 2.3x 5.1x 85% 80% 16.3% 1,474.9 2,979.9
6.1x 3.9x 4.1x 3.6x 7.8x 2.4x 0.7x 86% 80% 12.1% 1,607.3 3,198.3
6.1x 3.9x 4.1x 3.6x 7.8x 2.4x 2.1x 86% 80% 12.1% 1,607.3 3,198.3
5.5x 3.5x 4.4x 3.9x 7.6x 2.6x 1.6x 85% 78% 11.3% 1,880.3 3,466.3
4.6x 3.4x 5.1x 4.7x 6.4x 3.0x 3.9x 82% 78% 12.5% 1,646.0 3,499.0
4.2x 2.5x 5.0x 4.4x 5.0x 3.2x 5.4x 82% 73% 7.7% 1,508.1 3,004.1
5.3x 3.6x 5.4x 4.8x 5.9x 3.2x 1.6x 86% 81% 4.0% 1,508.1 3,914.8
5.3x 3.6x 5.4x 4.8x 5.9x 3.2x 3.0x 86% 81% 4.1% 1,508.1 3,914.8
4.9x 4.2x 5.3x 5.0x 6.3x 2.8x 2.6x 82% 79% 3.3% 1,508.1 4,499.2
4.2x 2.5x 5.0x 4.4x 5.2x 3.2x 2.9x 82% 73% 7.7% 1,646.0 3,142.0
Capital Structure Pro Forma Revolver due 2011/2013 (L+400 bp) Term loan due Apr 2014 (L+425 bp) Senior FRN's due May 2014 (L+250 bp) 7.625% Senior Notes due May 2014 7.75% Senior Notes due May 2016 9.625% Senior Notes due March 2018 8.25% Senior Notes due January 2019 3.50% Convertible Notes due 2014 Other Total Corporate Debt Less cash Net Corporate Debt Debt due to Avis Budget Rental Car Funding Budget Truck funding program Other Total debt under vehicle programs Total Gross Debt (fleet & corporate)
Amt Outst 0.0 268.0 250.0 200.0 375.0 445.0 602.0 345.0 13.0 2,498.0 1,002.0 1,496.0 5,326.0 194.0 613.0 6,133.0 8,631.0
Book Levrge 0.4x 0.4x 4.2x 4.2x 4.2x 4.2x 4.2x 4.2x 4.2x 4.2x -2.5x ----5.0x
Liquidity Revolver Size - Amt Drawn - LCs Drawn Amt Available Cash on hand Net Liquidity
LTM 1,200.0 0.0 784.0 416.0 1,002.0 1,418.0
Corporate Debt Maturities 2012 2013 2014 2015 2016 Thereafter
5.0 5.0 1,063.0 0.0 375.0 1,050.0
Pension Proj Benefit Oblig Plan Assets Over/(Under)funded
236.0 173.0 (63.0)
Segment Revenues US Car Rental Intern'l Car Rental Truck Rental
LTM 74% 19% 7%
Fleet General Motors Ford Hyundai Other
2009 32% 20% 14% 34%
Fleet Debt Maturities 2012 2013 2014 2015 2016 Thereafter
2,251.0 815.0 658.0 771.0 741.0 897.0
108
December 13, 2011
High Yield
Retail: Coverage view and recommendations

Karen Eltrich Goldman, Sachs & Co. karen.eltrich@gs.com 1-212-902-6957 Jordan Hughes Goldman, Sachs & Co. jordan.hughes@gs.com 1-212-357-7875 We maintain our Neutral view on the Retail sector. In light of the current inflationary environment and uncertain consumer spending outlook, we believe that defensive positioning will be best for 2012 in our sector and prefer less cyclical names like Rite Aid and Burlington Coat Factory. We think that consumers will be resistant to price increases and shop promotionally as the economy slowly moves along. While retail valuations of our names overall remain wide to the high yield universe, we believe that the discount is justified given the current conditions in the sector. Its our view that in this environment strong results will be rewarded and trade tightly while disappointing results will be punished disproportionately.
Exhibit 119: Relative Valuation

Retail
Security Asbury (ABG) ABG 7.625% Sr. Sub Notes ABG 8.375% Sr. Sub Notes ABG 3% Sr. Sub Converts Brookstone (BRSTNE) BRSTNE 13% Sr. Sec Notes Burlington Coat Factory (BCFACT) BCFACT 10% Sr. Notes Collective Brands (PSS) PSS 8.25% Sr. Notes Gamestop (GME) GME 8% Sr. Notes J Crew Group (JCG) JCG 8.125% Sr. Notes Michaels Stores (MIK) MIK 7.75% Sr. Notes MIK 11.375% Sr. Sub Notes MIK 13% Sr. Sub Discount Notes Pep Boys - Manny, Moe, & Jack (PBY) PBY 7.5% Sr. Sub Notes Rite Aid (RAD) RAD 9.75% Sr. Sec 1st Lien Notes RAD 8% Sr. Sec 1st Lien Notes RAD 10.375% Sr. Sec 2nd Lien Notes RAD 7.5% Sr. Sec 2nd Lien Notes RAD 10.25% Sr. Sec 2nd Lien Notes RAD 8.625% Sr. Notes RAD 9.375% Sr. Notes RAD 9.5% Sr. Notes RAD 6.875% Sr. Notes RAD 7.7% Sr. Notes RAD 6.875% Sr. Notes The Neiman Marcus Group (NMG) NMG 7.125% Sr. Sec Notes NMG 10.375% Sr. Sub Notes The Yankee Candle Company, Inc. (YCC) YCC 8.5% Sr. Opco Notes YCC 9.75% Sr. Sub Notes YCC 10.25% Sr. PIK Holdco Notes 2/15/2015 2/15/2017 2/15/2016 IL Current 2/15/2012 2/15/2012 $104.25 $104.88 $105.00 $325.0 mn $188.0 mn $315.0 mn B2/B B3/CCC+ Caa1/CCC+ $99.00 $97.00 $91.00 8.86 10.51 13.11 808 930 1,250 6/1/2028 10/15/2015 IL N/A Current N/A $103.46 $125.0 mn $500.0 mn B2/BBCaa1/B$90.00 $103.75 8.25 6.14 589 595 $792 $189 23.8% 1.9x 13.1% 3.5x 3.5x 4.5x 6.1x 6.1x 6/12/2016 8/15/2020 7/15/2016 3/1/2017 10/15/2019 3/1/2015 12/15/2015 6/15/2017 8/15/2013 2/15/2027 12/15/2028 6/12/2013 8/15/2015 7/15/2012 3/1/2012 10/15/2014 Current Current 6/15/2012 N/A N/A N/A $104.88 $104.00 $105.19 $103.75 $105.13 $104.31 $104.69 $104.75 N/A N/A N/A $410.0 mn $637.5 mn $470.0 mn $500.0 mn $270.0 mn $459.0 mn $405.0 mn $808.7 mn $180.3 mn $295.0 mn $128.0 mn B3/B+ B3/B+ Caa2/BCaa2/BCaa2/BCaa3/CCC Caa3/CCC Caa3/CCC Ca/CCC Ca/CCC Ca/CCC $109.00 $109.00 $106.00 $99.00 $109.25 $94.00 $93.25 $89.00 $96.00 $70.00 $68.00 6.49 6.20 7.76 7.73 8.16 10.88 11.53 12.31 9.52 12.05 11.10 585 531 707 649 724 1,009 1,058 1,103 887 983 881 $4,310 12/15/2014 IL Current $101.25 $147.6 mn B3/B $100.00 7.50 687 $25,601 $899 3.5% 1.7x 27.9% 4.1x 2.8x 4.1x 5 Yr CDS Bid/Ask: 1025/1062 Guaranteed Unsecured Debt/EBITDA: 5.9x 6.8x 3.5x 30.8% 3.8x 4.6x 5.1x 5 Yr CDS Bid/Ask: 583/623 6.5x 3.7% 3.1% 6.8x 7.3x 0.6% 11/1/2018 11/1/2016 11/1/2016 IL OP 11/1/2014 Current Current $103.88 $105.69 $106.50 $800.0 mn $392.9 mn $329.6 mn Caa1/CCC Caa2/CCC Caa2/CCC $99.50 $105.25 $106.00 7.84 9.20 10.45 626 855 981 $2,058 3/1/2019 OP 3/1/2014 $104.06 $400.0 mn Caa1/CCC+ $94.75 9.13 750 $4,184 $688 16.4% 2.8x 15.8% 3.7x 3.7x 4.3x 4.8x 45.1% 0.9x 1.8x 3.8x 12.3% 4.3x 5.8x 4.6% 10/1/2012 IL Current $100.00 $125.0 mn Ba1/BB+ $100.00 7.87 783 $1,808 $293 16.2% 3.2x 32.4% 4.1x 5.4x 6.1x 5.8% 8/1/2013 IL Current $100.00 $125.0 mn B3/B$100.25 4.76 453 $9,836 $836 8.5% 41.0x 22.1% 0.0x 0.3x 2.5x 157.9% 2/15/2019 OP eld ield Not App Not Ap $.0 mn Caa1/CCC $97.00 10.60 #N/A N/A $3,419 $204 6.0% 5.1x 51.5% 2.4x 3.0x 5.7x 2.8% 10/15/2014 OP 10/15/2012 $106.50 $115.6 mn NR/CCC+ $80.00 22.99 2,228 $3,845 $355 9.2% 2.9x 37.5% 2.8x 4.1x 5.4x 6.0% 3/15/2017 11/15/2020 9/15/2012 IL 3/15/2012 $103.81 11/15/2015 $104.19 N/A N/A $143.2 mn $200.0 mn $20.70 Caa1/BCaa1/BNR/B$98.00 $100.25 $99.13 8.10 8.32 4.19 685 674 326 $507 $35 6.9% 1.8x 20.4% 0.1x 4.4x 6.5x 4.2% Maturity GS Rating Next Call Date Price Amount Oustanding Bid Price For the projected year end (unless otherwise noted) Senior Debt/ Debt/ EBITDA EBITDA/ Capex/ Margin Interest EBITDA EBITDA EBITDA 3.9% 3.9x 14.9% 0.8x 3.1x Debt+Rent*8/ EBITDAR 4.5x FCF/ Debt 9.1%
Rating
YTW
Z-Spr
Sales $4,326
EBITDA $168
Sr. Notes Debt/EBITDA: Sr. Sub Notes Debt/EBITDA: Discount Notes Debt/EBITDA: $166 8.0% 6.4x
1st Lien Debt/EBITDA:
OP OP
2nd Lien Debt/EBITDA:
Unsecured Debt/EBITDA: $578 13.4%
Sr. Opco Notes Debt/EBITDA: Sr. Sub Opco Notes Debt/EBITDA: Sr. PIK Holdco Notes Debt/EBITDA:
109
December 13, 2011
High Yield
Burlington Coat Factory: Value focus and value in bonds

TKR BCFACT GS Rating OP Size (MM) $450 Coupon (%) 10.000% Priority Sr. Notes Maturity 2/15/2019 Agency Ratings Caa1/#N/A Next Call Price Date 105.000 2/15/2015 Bid Price 97.00 YTW (%) 10.60 STW (bp) 902

We reiterate our Outperform rating on Burlington Coat Factory. With its value positioning we believe BCF will prove defensive in the current challenging economy. Furthermore, we believe the companys return to more in-market purchasing is producing more compelling merchandise, as evidenced by the 4% comp store sales gain reported for 2Q11. Finally, an important distinction for BCF relative to other apparel-related companies has been its ability to control inventory levels, which have remained in line with sales growth.

Burlington Coat reported 2Q EBITDA of $23 mn versus $8 mn one year ago, healthily beating our forecast of $9 mn. The companys plan to charge lower initial prices, resulting in fewer markdowns and higher inventory, appears to be playing out well. Gross margins improved 50 bp year over year, and comparable-store inventories were down 6% yoy while total inventory increased less than 1%. The company also experienced a 160 bp improvement in SG&A from increased operating leverage. We remain constructive about the companys ability to maintain its gross margin level year over year even in a challenging macro environment due to the companys inventory management initiatives as well as its flexible buying model, which enables it to mitigate product cost increases. We are maintaining our EBITDA forecast of $355 million for FY2011 versus $338 million FY2010, providing coverage and leverage of 2.9x and 4.1x, respectively.

The key downside risk is failure to execute on core initiatives and plans.
Company description
Burlington Coat Factory is a recognized retailer of high-quality, branded apparel at everyday low prices (EDLP). The company operates more than 460 stores in 44 US states, primarily under the Burlington Coat Factory Warehouse name.
110
December 13, 2011
High Yield
Exhibit 121: Burlington Coat Factory Financial model

($, millions)
Year 1/29/11 Revenues: Net Sales % Change Other Revenue % Change Total Revenues % Change Cost of Merchandise Sold Gross Profit Gross Margin SG&A Expense % Of Sales Other Expense Depreciation & Amortization Operating Income Operating Margin Depreciation & Amortization Extraordinary/One-time Items EBITDA EBITDA Margin Interest Expense Other Expense/(Income) Earnings Before Taxes (Ongoing) Tax Rate Taxes Net Income (Ex. Discount. Operations) Extraordinary Loss Loss from Discontinued Operatins Net Income Capital Expenditures Total Capital Expenditures/Sales Total Debt Cash Net Debt Accounts Receivable Merchandise Inventories Accounts Payable Rent Expense EBITDA/Interest EBITDA-Capex/Interest Bank Debt/EBITDA Debt/EBITDA Net Debt/EBITDA $3,669.6 4.2% 31.5 2.1% $3,701.1 4.1% 2,252.3 1,448.7 39.1% 1,156.6 31.3% 2.4 146.8 143.0 3.9% 146.8 48.4 338.1 9.1% 99.3 (9.5) 53.2 41.6% 22.1 31.0 0.0 0.0 31.0 132.1 3.6% 1,372.3 30.2 1,342.1 49.9 644.2 190.5 165.1 3.4x 2.1x 2.8x 4.1x 4.0x 1Q 4/30/11 $929.1 3.8% 7.3 -0.4% $936.4 3.8% 577.3 359.0 38.3% 288.8 30.7% 0.0 36.6 33.6 3.6% 36.6 10.2 80.4 8.6% 30.9 35.0 (32.2) 38.0% (11.2) (21.0) 0.0 0.0 (21.0) 33.1 3.5% 1,462.4 67.5 1,394.9 33.8 689.0 489.5 43.5 3.3x 1.9x 2.9x 4.3x 4.1x 2Q 7/30/11 $793.3 8.9% 7.1 2.0% $800.4 8.8% 507.1 293.4 36.7% 276.7 35.5% 5.2 37.4 (25.9) -3.2% 37.4 11.6 23.1 2.9% 32.3 (2.3) (55.9) 38.0% (23.1) (32.8) 0.0 0.0 (32.8) 35.1 4.4% 1,531.7 31.8 1,499.9 28.0 665.2 415.1 43.5 3.3x 1.9x 3.0x 4.3x 4.2x 3QE 10/29/11 $890.0 3.7% 8.0 2.0% $898.0 3.7% 546.0 352.0 39.2% 287.4 32.0% 0.0 38.0 26.7 3.0% 38.0 2.0 66.7 7.4% 30.2 0.0 (3.6) 38.0% (1.4) (2.2) 0.0 0.0 (2.2) 35.0 3.9% 1,542.7 67.7 1,475.0 39.5 925.2 708.6 43.5 3.1x 2.0x 3.0x 4.3x 4.1x 4QE 1/28/12 $1,200.6 1.1% 9.8 2.0% $1,210.4 1.1% 712.9 497.5 41.1% 308.6 25.5% 0.0 44.0 144.8 12.0% 38.0 2.0 184.8 15.3% 29.9 0.0 114.9 38.0% 43.7 71.2 0.0 0.0 71.2 30.0 2.5% 1,470.7 73.9 1,396.8 50.4 651.1 192.5 43.5 2.9x 1.8x 2.8x 4.1x 3.9x YearE 1/28/12 $3,813.1 3.9% 32.1 2.0% $3,845.2 3.9% 2,343.3 1,501.9 39.1% 1,161.6 30.2% 5.2 156.0 179.2 4.7% 150.0 25.8 355.0 9.2% 123.3 32.6 23.2 34.4% 8.0 15.2 0.0 0.0 15.2 133.2 3.5% 1,470.7 73.9 1,396.8 50.4 651.1 192.5 174.0 2.9x 1.8x 2.8x 4.1x 3.9x 1QE 4/28/12 $935.7 0.7% 7.4 2.0% $943.1 0.7% 576.2 366.9 38.9% 289.5 30.7% 0.0 38.0 39.3 4.2% 38.0 2.0 79.3 8.4% 28.7 0.0 10.6 38.0% 4.0 6.6 0.0 0.0 6.6 30.0 3.2% 1,378.7 72.6 1,306.1 34.0 693.9 493.0 45.8 2.9x 1.8x 2.6x 3.9x 3.7x 2QE 7/28/12 $780.4 -1.6% 7.2 2.0% $787.6 -1.6% 500.1 287.5 36.5% 281.2 35.7% 0.0 36.0 (29.7) -3.8% 36.0 2.0 8.3 1.1% 28.4 0.0 (58.1) 38.0% (22.1) (36.0) 0.0 0.0 (36.0) 35.0 4.4% 1,421.7 43.9 1,377.8 27.6 654.5 408.4 45.8 2.9x 1.8x 2.8x 4.2x 4.1x 3QE 10/27/12 $900.6 1.2% 8.2 2.0% $908.8 1.2% 551.6 357.2 39.3% 291.7 32.1% 0.0 38.0 27.4 3.0% 38.0 2.0 67.4 7.4% 28.7 0.0 (1.2) 38.0% (0.5) (0.8) 0.0 0.0 (0.8) 30.0 3.3% 1,425.7 71.7 1,354.0 40.0 936.2 717.1 45.8 2.9x 1.9x 2.8x 4.2x 4.0x 4QE 1/26/13 $1,217.1 1.4% 9.9 2.0% $1,227.1 1.4% 724.0 503.1 41.0% 315.4 25.7% 0.0 38.0 149.7 12.2% 38.0 2.0 189.7 15.5% 28.9 0.0 120.8 38.0% 45.9 74.9 0.0 0.0 74.9 30.0 2.4% 1,404.7 78.6 1,326.1 51.1 660.1 195.2 45.8 3.0x 1.9x 2.7x 4.1x 3.8x YearE 1/26/13 $3,833.8 0.5% 32.7 2.0% $3,866.6 0.6% 2,352.0 1,514.6 39.2% 1,177.8 30.5% 0.0 150.0 186.8 4.8% 150.0 8.0 344.8 8.9% 114.6 0.0 72.2 38.0% 27.4 44.7 0.0 0.0 44.7 125.0 3.2% 1,404.7 78.6 1,326.1 51.1 660.1 195.2 183.0 3.0x 1.9x 2.7x 4.1x 3.8x
111
December 13, 2011
High Yield
Rite Aid: Still like the guaranteed notes maturing in 2015

TKR RAD RAD RAD GS Rating OP OP U Size (MM) $500 $459 $295 Coupon (%) 7.500% 8.625% 7.700% Priority 2nd Lien Sr. Notes Sr. Notes Maturity 3/1/2017 3/1/2015 2/15/2027 Agency Ratings Caa2/BCaa3/CCC Ca/CCC Next Call Price Date 103.750 3/1/2012 104.313 Current N/A N/A Bid Price 99.00 94 70 YTW STW (%) (bp) 7.73 649 10.88 1,009 12.05 983 5 yr CDS bid / ask 18 pts / 19 pts

Rite Aid has shown positive sales momentum in 2011 as its Wellness+ loyalty program gains traction with consumers and through the store-wide expansion of its immunization program. We believe that in 2012 the company will also have the benefit of positive industry dynamics, including a high number of generic introductions and potential share gains from the Walgreens/Express Scripts disagreement. Unless a resolution is reached, on January 1 members of Express Scripts will no longer be able to fill their prescriptions at Walgreens, representing $5 billion in sales. While we do not expect RAD to receive the lions share of these sales, we do believe it represents a considerable opportunity for the company. We think the 7.5% 2nd lien notes and the 8.625% senior unsecured guaranteed notes have a more favorable risk/reward profile than the 7.7% unguaranteed notes given their more senior position in the capital structure and collateral in the event of default.

RAD reported 2Q EBITDA of $184 mn versus $181 mn in the year-ago period and our forecast for flat results. The company lowered its capex guidance for FY2012 from $300 mn to $250 mn after shelving its Save-A-Lot initiatives. RAD used the incremental cash savings to pay down $50 mn of debt, buying back $40 mn on the 8.625% notes due March 2015 and $10 mn of other notes due in 2013 and 2015. RAD adjusted its FY2012 EBITDA guidance to between $825 mn and $900 mn. The number of Wellness+ members increased 10% qoq to 44 mn from 40 mn, and members accounted for a larger portion of sales and scripts than in Q1. RAD guided that 300 wellness store remodels would be completed this year and around 500 remodeled in FY2013. After RADs 2Q earnings we increased our FY2011 EBITDA forecast to $899 mn. Under this forecast, the company ends FY2011 with coverage of 1.7x and leverage of 6.9x.

The key downside risk to our OP rating is a competitive response to Wellness+.
112
December 13, 2011
High Yield
Company description
Rite Aid is one of the largest drugstore chains in the US, with more than 4,700 locations in 31 states and the District of Columbia. In June 2007 Rite Aid acquired Jean Coutu USA, the holding company for the Brooks and Eckerd drugstore chains. Exhibit 123: Rite Aid Financial model
($, millions)
Year 2/26/11 Revenues % Change COGS Gross Profit Gross Margin SG&A Expenses % of Revenues Store closing, impairment, other charges Operating Income Operating Margin Depreciation & Amortization Store Closing impairment, other charges Other EBITDA EBITDA Margin Interest Expense, Net Share loss from equity investment loss on debt conversions and modifications Earnings Before Taxes (Ongoing) Tax Rate Taxes(benefit) Net Income before Extraordinary Item Extradorinary Items Net Income $25,214.9 -1.8% 18,522.4 6,692.5 26.5% 6,457.8 25.6% 210.9 23.8 0.1% 507.5 310.1 17.5 858.9 3.4% 547.6 (6.8) 28.6 (545.6) -1.8% 9.8 (555.4) 0.0 (555.4) 1Q 5/28/11 $6,390.8 -0.1% 4,699.9 1,690.9 26.5% 1,586.2 24.8% 17.1 87.6 1.4% 117.1 58.2 0.0 262.9 4.1% 130.8 0.0 17.6 (60.8) -3.7% 2.3 (63.1) 0.0 (63.1) 2Q 8/27/11 $6,271.1 1.8% 4,622.1 1,649.0 26.3% 1,603.8 25.6% 15.1 30.1 0.5% 108.7 45.5 0.0 184.3 2.9% 130.8 0.0 (5.8) (95.0) 2.9% (2.7) (92.3) 0.0 (92.3) 3QE 11/26/11 $6,314.0 1.8% 4,653.4 1,660.6 26.3% 1,597.4 25.3% 80.0 (16.9) -0.3% 115.0 121.0 0.0 219.1 3.5% 133.0 0.0 0.0 (149.8) 6.7% (10.0) (139.8) 0.0 (139.8) 4QE 3/3/12 $6,650.2 3.0% 4,907.8 1,742.3 26.2% 1,669.2 25.1% 55.0 18.2 0.3% 115.0 100.0 0.0 233.2 3.5% 132.2 0.0 0.0 (114.1) 8.8% (10.0) (104.1) 0.0 (104.1) YearE 3/3/12 $25,626.0 1.6% 18,883.2 6,742.8 26.3% 6,456.6 25.2% 167.2 119.0 0.5% 455.8 324.7 0.0 899.4 3.5% 526.8 0.0 11.9 (419.7) 4.9% (20.4) (399.2) 0.0 (399.2) 1QE 6/2/12 $6,486.7 1.5% 4,761.2 1,725.5 26.6% 1,602.2 24.7% 15.0 108.2 1.7% 116.0 45.0 0.0 269.2 4.2% 130.9 0.0 0.0 (22.7) 40.0% (9.1) (13.6) 0.0 (13.6) 2QE 9/1/12 $6,346.3 1.2% 4,677.3 1,669.1 26.3% 1,599.3 25.2% 15.0 54.8 0.9% 110.0 25.0 0.0 189.8 3.0% 131.7 0.0 0.0 (76.9) 40.0% (30.8) (46.2) 0.0 (46.2) 3QE 12/1/12 $6,389.8 1.2% 4,709.3 1,680.5 26.3% 1,603.8 25.1% 15.0 61.7 1.0% 114.0 55.0 0.0 230.7 3.6% 133.6 0.0 0.0 (72.0) 40.0% (28.8) (43.2) 0.0 (43.2) 4QE 3/2/13 $6,663.5 0.2% 4,921.0 1,742.5 26.2% 1,672.5 25.1% 15.0 55.0 0.8% 114.0 55.0 0.0 224.0 3.4% 133.5 0.0 0.0 (78.5) 40.0% (31.4) (47.1) 0.0 (47.1) YearE 3/2/13 $25,886.2 1.0% 19,068.7 6,817.5 26.3% 6,477.8 25.0% 60.0 279.7 1.1% 454.0 180.0 0.0 913.7 3.5% 529.7 0.0 0.0 (250.0) 40.0% (100.0) (150.0) 0.0 (150.0)
Capital Expenditures Total Capital Expenditures/Sales Total Debt Cash Net Debt Bank Debt Accounts Receivable Inventories Accounts Payable EBITDA/Interest EBITDA-Capex/Interest 1st lien Debt/EBITDA 2nd lien Debt/EBITDA Total Debt/EBITDA Net Debt/EBITDA
194.6 0.8% 6,219.9 91.1 6,128.7 2,077.9 966.5 3,158.1 1,307.9 1.6x 1.2x 2.9x 4.3x 7.2x 7.1x
58.4 0.9% 6,170.6 230.6 5,939.9 2,028.7 962.5 3,170.5 1,354.3 1.6x 1.2x 2.8x 4.2x 7.1x 6.8x
52.5 0.8% 6,191.8 78.4 6,113.5 2,099.2 949.1 3,290.2 1,335.4 1.0% 1.7x 1.2x 2.8x 4.2x 7.1x 7.0x
80.0 1.3% 6,248.3 78.3 6,170.0 2,206.2 992.0 3,315.8 1,315.6 1.7x 1.2x 2.8x 4.2x 7.1x 7.0x
60.0 0.9% 6,118.3 80.1 6,038.2 2,076.2 995.5 3,177.9 1,347.1 1.7x 1.2x 2.9x 4.3x 6.8x 6.7x
250.8 1.0% 6,118.3 80.1 6,038.2 2,076.2 995.5 3,177.9 1,347.1 1.7x 1.2x 2.8x 4.1x 6.8x 6.7x
75.0 1.2% 6,070.1 151.1 5,919.0 2,028.0 976.9 3,143.0 1,374.6 1.7x 1.2x 2.7x 4.1x 6.7x 6.5x
75.0 1.2% 6,230.1 150.8 6,079.3 2,188.0 960.5 3,254.7 1,351.4 1.7x 1.2x 2.7x 4.0x 6.8x 6.7x
75.0 1.2% 6,322.1 150.5 6,171.6 2,280.0 1,003.9 3,280.5 1,331.4 1.7x 1.2x 2.8x 4.1x 6.9x 6.7x
75.0 1.1% 6,207.1 152.2 6,054.9 2,165.0 997.4 3,109.2 1,349.8 1.7x 1.2x 2.9x 4.3x 6.8x 6.6x
300.0 1.2% 6,207.1 152.2 6,054.9 2,165.0 997.4 3,109.2 1,349.8 1.7x 1.2x 2.8x 4.1x 6.8x 6.6x
113
December 13, 2011
High Yield
Technology: Coverage view and recommendations

Limited visibility and high cyclicality keeps us Neutral
Franklin Jarman Goldman, Sachs & Co. franklin.jarman@gs.com 1-212-902-7537 Karl Blunden Goldman, Sachs & Co. karl.blunden@gs.com 1-212-357-2769 Our Neutral coverage view reflects our thesis that the 35 bp market discount offered by our HY Technology universe fairly compensates investors for (1) the sectors high degree of cyclicality and operating leverage; (2) the high beta nature of several legacy LBOs within the sector (FDC, FSL, NXP); and (3) the lack of visibility into near-term demand trends. With macro risk still weighted to the downside, we think consumer-dependent sectors like semiconductors and EMS will remain volatile although potentially positioned for a cycle bottom in early to mid-2012 after aggressive inventory reductions. We also expect demand across longer cycle sectors like network infrastructure or other software/services sectors to remain uncertain, as companies are still in the process of reducing spending until a more stable demand environment materializes. From a valuation perspective, we are approaching 2012 under the premise that elevated market volatility will continue to drive a comparably high degree of beta-adjusted single name correlation. We have therefore focused our efforts toward finding market-neutral trades that can provide material upside optionality if our medium-term credit thesis is confirmed. We believe there are attractive opportunities across both the First Data and Alcatel-Lucent capital structures where investors can create favorable risk/reward scenarios while mitigating market risk. From an outright perspective, our top credit pick remains Advanced Micro Devices (OP), which should continue to generate strong free cash flow while maintaining low leverage and strong liquidity in this uncertain environment.
Semiconductors: The outlook for the semiconductor sector remains uncertain. While
inventories remain at relatively low levels, visibility into end market demand has declined in recent months. Weak 3Q2011 results, a soft 4Q2011 outlook as well as the Texas Instruments guidance reduction last week highlights the high degree of uncertainty across the sector. We believe investors can find cover in higher quality credits (like AMD) or in the secular growth stories that can outperform more cyclically dependent stories. Specifically, we expect demand for tablets and smartphones to continue to drive growth across the semiconductor sector. At a broader level, our Hardware and CommTech research teams are modeling 2012 yoy unit growth of 4% for PCs (ex-tablets) and 9.5% for handsets.
Network Infrastructure: We believe overall service provider capex could decline as much as 4% yoy in 2012 after solid growth in 2011. Legacy wireless infrastructure upgrades in the US should create difficult comps for 2012 until 4G network spending accelerates in earnest. Asia Pacific growth should provide a positive offset although we expect European network spending to disappoint. Software & Services: Our equity research counterparts recently affirmed their
expectations for global IT spending growth to slow to 3% in 2012, following 5% growth in 2011 and 8% growth in 2010. A year-end 2011 budget flush appears unlikely at this point given the elevated macro concerns among CIOs and risks to 2012 appear weighted to the downside. Secular growth opportunities remain cloud computing build-outs, a shift to mobility in the enterprise segment, and further needs for security and applications development.
Call Center Outsourcing: We believe service providers could be poised for another year of
positive revenue growth in 2012 but expect some deceleration from solid mid-single digit call volume growth in 2011. The call center outsourcing cycle typically lags the economic cycle by 6-12 months and we think the recovery that began in 2011 could extend into 2012, benefitting credits like Stream Global Services (IL) and Sitel (IL).
114
December 13, 2011
High Yield
First Data Corp: Cash-CDS basis trade provides optionality

Exhibit 124: First Data benchmark securities & CDS
Ticker FDC FDC FDC FDC FDC Issue 9.875% Senior Notes 10.55% Sr. PIK Toggle Notes 12.625% Senior Notes 11.250% Subordinated Notes CDS Maturity 24-Sep-15 24-Sep-15 15-Jan-21 31-Mar-16 5 year GS Rating In-Line In-Line NR In-Line Rating Caa1/BCaa1/BCaa1/BCaa2/CCC+ Amt. 784 711 3,000 2,500 Price 93.0 94.0 87.0 82.0 25 pts YTW 12.2% 12.6% 15.3% 17.4% STW 1,130 -1,355 1,630
As a market neutral cash-CDS basis trade, we recommend investors buy FDCs 12.625% senior notes due 2021 at $87.00 (15.3% YTW) and buy FDC 5-year CDS at 25 points up front on a notional neutral basis. Based on the Goldman Sachs macro view that elevated market volatility will persist, we think outright long or short positions in First Data unsecured bonds will continue to carry an uncomfortable degree of mark-to-market risk. The unsecured notes remain some of the highest beta bonds in the high yield market, reflecting the companys reliance upon the capital markets to extend its debt maturity schedule. Looking to 2012, we are maintaining an In-Line rating on First Data bonds but believe the capital structure provides a unique opportunity to create a market neutral, carry positive position coupled with credit-driven upside optionality. Key risks to our thesis include the mark-to-market risk highlighted below. Exhibit 125: Examining upside/downside return scenarios across FDCs capital structure
Capital Structure Revolver (L+275) due Sep-2013 Revolver (L+400) due Sept-2016 Term Loan Facility (L+275) due Sep-2014 Extended Term Loan (L+400) due Mar-2018 7.375% Secured Notes due June-2019 8.875% Secured Notes due Aug-2020 Foreign bank lines Capital Leases & Other Total First Lien Debt 8.25% 2nd Lien Notes due Jan-2021 8.75%/10% 2nd Lien PIK Togs due Jan-2022 Total 2nd Lien Debt 9.875% Senior Nts due Sep-2015 10.55% Senior PIK Nts due Sep-2015 12.625% Sr Nts due Jan-2021 Total Sr Unsecured Debt First Data 5 year CDS 11.25% Sr Sub Nts due Mar-2016 Total Subordinated Debt 11.5% New Omaha HoldCo Notes due Sep-2016 Total HoldCo Debt OpCo Gross Debt Consolidated Gross Debt Less cash Net Debt Caa2/CCC+ 2,500.0 2,500.0 1,402.0 1,402.0 22,803.0 24,205.0 402.4 23,802.6 10.6x 10.6x 11.2x 11.2x 10.6x 11.2x -11.0x Credit Rating B1/B+ B1/B+ B1/B+ -B1/B+ B1/B+ --Amt Outst 11.0 22.0 6,578.0 4,667.0 750.0 510.0 55.3 177.7 12,771.0 2,000.0 1,000.0 3,000.0 784.0 748.0 3,000.0 4,532.0 Book Lever. 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 7.3x 7.3x 7.3x 9.4x 9.4x 9.4x 9.4x 25.00 82.00 8.00 102.00 -22.00 31.25 -9.25 80.00 24.69 50.00 -46.06 -3.94 Current Price --------Assumed Price --------Scenario 1 Return over 1 Yr --------1 Yr Return vs CDS --------Assumed Price --------Scenario 2 Return over 1 Yr --------1 Yr Return vs CDS ---------
Caa1/BCaa1/B-
85.00 --
95.00 --
18.25 --
-3.75 --
54.44 --
-22.31 --
27.69 --
Caa1/BCaa1/B-
93.00 94.00 87.00
102.47 102.64 108.50
19.34 19.19 34.13
-2.66 -2.81 12.13
37.28 38.46 42.09
-45.84 -44.99 -32.28
4.16 5.01 17.72
--
--
--
--
--
--
--
--
----
Source: Goldman Sachs Credit Research, company reports.
Why the trade should outperform in 2012

We believe this trade provides attractive return through both upside (+12 points) and downside (+18 points) credit scenarios, and it also hedges FDCs extreme market beta and provides positive annual carry of 7.625 points. The market hedge is especially important given our base case view that First Datas 2012 EBITDA growth story remains intact but
115
December 13, 2011
High Yield
anemic and decelerating, which could leave the fate of its capital structure options up to the volatility of the capital markets. This basis trade is designed to provide material upside in the event the company can move closer to refinancing its capital structure over the next year. However, we also believe it should provide some upside in a severe downside scenario where investors believe a future refinancing is no longer an option. Exhibit 125 highlights our view of how this trade will perform based on two primary credit-driven scenarios: (1) FDCs EBITDA growth comes in ahead of expectations through 2012 and a recovery in the capital markets enables the company to extend the majority of its 2014 bank debt and refinance its 2015 bond maturities. We assume the unsecured bonds return to trading on a yield-to-worst basis offering the company new unsecured issuance opportunities. (2) High yield markets continue to unravel, FDC EBITDA growth slows and the company draws on its revolver to fund its increased interest and ongoing capex needs. We assume FDC bond valuations begin to trade in line with the weaker LBO credits (HET/CCU) reflecting a recovery-plus-coupons valuation. Scenario 1 in Exhibit 125 examines the upside case, which should enable the 12.625% senior notes to trade up 21.5 points to $108.50 for a yield of 11% assuming a high yield market rally enables FDC to refinance its front-end maturities. Our view is based on the thesis that the company would need to issue new senior unsecured debt in the 11% range or tighter implying the 12.625% notes would also trade at this level. On the downside, we would expect CDS to tighten 16 points to 8 points up front although further tightening could be constrained by the companys levered balance sheet and the risk that a stub 2014 bank debt maturity would likely remain outstanding even after an extension since a new secured notes issue could only pay down bank debt on a pro rata basis. All in, we would expect Scenario 1 to provide investors with a net return of 12 points assuming 1 year of carry. Scenario 2 examines the downside case, which should drive FDCs senior notes to trade on a coupons-plus-recovery basis. We think there could be limited recovery for the senior notes in a restructuring but acknowledge that the sponsors would likely not file the business until the bank debt maturity in September 2014. As a result, we assume the 12.625% senior notes would trade to $42.00 in this scenario ($20 recovery value plus 1.75 years of coupon) leading to 32 points of downside risk. However, we also would expect CDS to trade to recovery levels of 80 points up front in this scenario, implying 50 points of upside to the CDS leg of the trade. All in, we would expect Scenario 2 to provide investors with a net return of 18 points assuming 1 year of carry. We believe the greatest risk to this trade will be market volatility and the fluctuations in the bond-CDS basis. While the CDS leg serves to hedge market volatility, the historical beta of FDCs 5-year CDS has been lower than the 12.625% senior notes. As a result, the recent wides for the CDS reached 35 points up front in September where the bonds traded down to $73 points implying 4 points of mark-to-market risk in this trade if those levels are revisited. On a positive note, investors would collect 7.625 points of positive carry over a year, which should help mitigate the market-to-market basis risk in our view.

While First Datas 3Q2011results were better than our expectations, we believe it is becoming more apparent that FDC's EBITDA growth trajectory should leave it short of its $3.0 billion year-end 2013 target. More importantly, we believe recent increases in cash interest will squeeze excess free cash flow to its tightest margin since the 2007 LBO. We are also concerned over downside risk to the operating environment as FDC acknowledged
December 13, 2011
High Yield
that core payment trends slowed in the first weeks of 4Q2011. We acknowledge there are still some significant growth opportunities in international markets (i.e. India, Brazil), mobile payments and even through the Durbin legislation. However, we believe much of the opportunity will likely come beyond the company's 2014 refinancing hurdle. Looking to 2012, we expect the company to generate $2.29 billion of EBITDA (34% margin) reflecting stable mid-single digit transaction volume growth, improving credit card mix and incremental cost savings. Following the recent extension transactions, however, cash interest should increase to $1.8 billion which, along with $440 million of capex, should constrain free cash flow. We expect FDCs leverage to end 2012 at a still-elevated level of 10.0x, albeit down slightly from 10.4x at year-end 2011. Exhibit 126: First Data free cash flow summary and expectations
Adjusted EBITDA Cash Interest Expense Cash Taxes Change in Working Capital Other Cash from Operations Capital Spending Pymts to Secure Cust Svc Contracts Free Cash Flow FY08 2,574 (1,425) 0 (584) (130) 436 (331) (181) (76) FY09 2,132 (1,412) 0 (194) 474 1,000 (199) (180) 621 FY10 2,027 (1,495) 0 (287) 510 755 (210) (160) 385 FY11E 2,191 (1,434) 0 134 53 945 (195) (187) 562 FY12E 2,290 (1,832) 0 (30) (30) 398 (235) (206) (43)
Source: Goldman Sachs and company reports.
Company description
First Data Corporation is the largest third-party independent merchant acquiring company in the world. It provides electronic commerce and payment solutions for merchants, financial institutions, and card issuers. The company is organized into three primary segments through which it reports revenues and earnings: Retail & Alliance Services, Financial Services, and International. The Retail & Alliance Services segment consists of FDCs businesses that facilitate a merchants ability to accept credit, debit, stored-value and loyalty cards, and checks. The Financial Services segment provides debit network access as well as credit and retail card processing services to a broad range of financial institutions. The International segment operates in four primary geographic regions and provides services similar to the other two segments for both merchant and financial customers.
117
December 13, 2011
High Yield
Exhibit 127: First Data Corp Financial model

Income Statement Consolidated Revenues YoY Change Seq. Change Adjusted Revenues YoY Change Seq. Change
Adjusted EBITDA EBITDA Margin Net Interest Expense Cash Flow Adjusted EBITDA Cash Interest Expense Cash Taxes Change in Working Capital Other Cash from Operations Capital Spending Pymts to Secure Cust Svc Contracts Free Cash Flow Acquisitions/Divestitures Share Issuance/Repurchase Debt issuance/repurchase Other Cash Flow Items Change in cash Balance Sheet Cash & Equivalents 1st Lien Secured Debt Total debt (Op Co) Net debt (Op Co) Credit Stats Secured (1st L) Debt/EBITDA Debt/EBITDA (Op Co) Net Debt/EBITDA (Op Co) EBITDA/Interest Exp. (EBITDA-Capex)/Interest Exp. FCF/Debt 5.0x 8.8x 8.6x 1.3x 1.2x -0.3% 6.1x 10.6x 10.3x 1.2x 1.1x 2.7% LTM Sep-11 Capital Structure Revolver due 9/24/13 (L+275) Revolver due 9/24/16 (L+400) Term Loan - B1 (L+275) due 9/24/14 Term Loan - Delayed Draw Term Loan - Euro (L+275) due 9/24/14 Term Loan - B2 (L+275) due 9/24/14 Term Loan - B3 (L+275) due 9/24/14 Term Loan - Ext (L+400) due 3/24/18 7.375% Secured Notes due 2019 8.875% Secured Notes due 2020 Foreign bank lines Capital Leases & Other 8.25% 2nd Lien Secured Notes due 2021 8.75%/10.0% 2nd Lien PIK Tog Nts due 202 9.875% Senior Nts due 2015 10.55% Senior PIK Nts due 2015 12.625% Unsecured Notes due 2021 11.25% Sr Sub Nts due 2016 Total OpCo Debt Less cash Net Debt Credit Rating B1/B+ B1/B+ B1/B+ -B1/B+ B1/B+ B1/B+ B1/B+ B1/B+ B1/B+ --Caa1/BCaa1/BCaa1/BCaa1/BCaa1/BCaa2/CCC+ ---Amt Outst 11.0 22.0 2,482.5 36.7 414.8 2,227.1 1,416.9 4,667.0 750.0 510.0 55.3 177.7 2,000.0 1,000.0 784.0 748.0 3,000.0 2,500.0 22,803.0 402.4 22,400.6 Book Lever. 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x 7.3x 7.3x 9.4x 9.4x 9.4x 10.6x 10.6x -10.4x Liquidity Revolver Size - Amt Drawn - LC's Amt Unutilized Cash Liquidity Foreign lines of credit* Pro Forma 1,518.3 11.0 44.9 1,462.4 402.4 1,864.8 266.8 Geographic Sales United States United Kingdom Germany Australia Other Int'l 2010A 79.8% 3.6% 3.6% 3.6% 9.3% Segment Sales Retail & Alliance Services Financial Services International Other LTM 50.3% 21.4% 24.6% 3.8% Debt Maturities - Pro Forma 2011 2013 2013 2014 2015 2016 Thereafter 33.0 0.0 15.0 6,578.0 1,532.0 2,500.0 12,112.0 6.4x 11.0x 10.7x 0.9x 0.9x 1.0% 6.4x 11.3x 11.0x 1.1x 1.0x 2.3% 6.4x 11.4x 11.2x 1.2x 1.0x 2.5% 6.3x 11.2x 11.0x 1.3x 1.2x 1.7% 6.3x 11.2x 11.0x 1.1x 1.0x 1.7% 6.2x 11.0x 10.8x 1.1x 0.9x 2.8% 6.1x 10.7x 10.5x 1.2x 1.1x 2.5% 5.9x 10.6x 10.4x 1.2x 1.1x 1.7% 5.8x 10.4x 10.1x 1.4x 1.2x 2.5% 5.8x 10.4x 10.1x 1.2x 1.1x 2.5% 5.6x 10.0x 9.7x 1.2x 1.1x -0.2% 5.3x 9.5x 9.2x 1.3x 1.2x 0.6% 5.9x 10.6x 10.4x 1.2x 1.1x 1.7% 406.3 12,844.7 22,572.5 22,166.2 737.0 13,011.8 22,609.8 21,872.8 731.4 13,214.1 22,989.1 22,257.7 583.7 12,783.2 22,557.7 21,974.0 442.0 12,771.8 22,732.2 22,290.2 509.5 12,804.6 22,709.3 22,199.8 509.5 12,804.6 22,709.3 22,199.8 335.5 12,881.4 22,786.1 22,450.6 611.5 12,849.3 22,754.0 22,142.5 402.4 12,771.0 22,803.0 22,400.6 686.1 12,738.0 22,770.0 22,083.9 686.1 12,738.0 22,770.0 22,083.9 643.1 12,738.0 22,870.0 22,226.9 777.2 12,738.0 22,980.0 22,202.8 402.4 12,771.0 22,803.0 22,400.6 2,574.1 (1,424.7) 0.0 (584.0) (129.8) 435.6 (330.7) (181.2) (76.3) (26,583.1) 7,040.0 19,350.6 6.9 (261.9) 2,131.5 (1,412.2) 0.0 (193.7) 474.0 999.6 (199.1) (180.0) 620.5 (101.2) 193.0 (449.2) 67.6 330.7 424.3 (506.5) 0.0 (490.3) 401.9 (170.6) (32.8) (48.5) (251.9) (1.7) 0.0 232.5 15.5 (5.6) 512.9 (184.0) 0.0 351.0 (85.7) 594.2 (62.6) (33.5) 498.1 21.7 (214.1) (343.7) (109.7) (147.7) 526.0 (498.5) 0.0 (80.6) 157.0 103.9 (62.1) (39.8) 2.0 0.4 0.8 (70.0) (74.9) (141.7) 563.8 (305.9) 0.0 (67.5) 36.8 227.2 (52.6) (37.8) 136.8 1.7 0.0 (25.3) (45.7) 67.5 2,027.0 (1,494.9) 0.0 (287.4) 510.0 754.7 (210.1) (159.6) 385.0 22.1 (213.3) (206.5) (214.8) (227.5) 467.8 (352.6) 0.0 (40.0) 33.2 108.4 (56.6) (52.4) (0.6) 0.0 0.0 (112.4) (61.0) (174.0) 561.1 (161.0) 0.0 205.0 (78.7) 526.4 (55.2) (51.3) 419.9 (11.6) (0.3) (65.1) (66.9) 276.0 564.5 (735.0) 0.0 (31.0) 105.6 (95.9) (31.6) (46.4) (173.9) 14.3 0.8 67.2 (117.2) (208.8) 597.9 (185.0) 0.0 0.0 (7.0) 405.9 (52.0) (37.2) 316.7 0.0 0.0 (33.0) 0.0 283.7 2,191.3 (1,433.6) 0.0 134.0 53.1 944.8 (195.4) (187.3) 562.1 2.7 0.5 (143.3) (245.1) 176.9 2,289.6 (1,831.6) 0.0 (30.0) (30.0) 398.1 (235.2) (205.8) (43.0) 0.0 0.0 0.0 0.0 (43.0) 2,421.7 (1,768.9) 0.0 (30.0) (30.0) 592.7 (248.1) (210.5) 134.1 0.0 0.0 0.0 0.0 134.1 2,157.2 (1,554.5) 0.0 66.5 96.9 766.1 (196.0) (187.9) 382.2 4.4 0.5 (135.6) (290.8) (39.3) FY Dec-08 FY Dec-09 1Q Mar-10 2Q Jun-10 3Q Sep-10 4Q Dec-10 FY Dec-10 1Q Mar-11 2Q Jun-11 3Q Sep-11 4QE Dec-11 FYE Dec-11 FYE Dec-12 FYE Dec-13 LTM Sep-11
8,811.3 9.4% -6,794.5 --2,574.1 37.9% 1,938.9
9,313.8 5.7% -6,278.9 -7.6% -2,131.5 33.9% 1,784.7
2,402.1 15.7% -7.1% 1,508.4 3.5% -9.4%

424.3 28.1% 446.9
2,614.7 18.4% 8.9% 1,620.8 4.2% 7.5%

512.9 31.6% 449.5
2,633.1 7.8% 0.7% 1,623.7 1.4% 0.2%

526.0 32.4% 453.7
2,730.5 5.6% 3.7% 1,688.0 1.4% 4.0%

563.8 33.4% 438.7
10,380.4 11.5% -6,440.9 2.6% -2,027.0 31.5% 1,788.8
2,544.2 5.9% -6.8% 1,537.3 1.9% -8.9%

467.8 30.4% 440.4
2,749.8 5.2% 8.1% 1,656.2 2.2% 7.7%

561.1 33.9% 460.4
2,731.8 3.7% -0.7% 1,661.0 2.3% 0.3%

564.5 34.0% 465.1
2,808.8 2.9% 2.8% 1,708.8 1.2% 2.9%

597.9 35.0% 439.0
10,834.6 4.4% -6,563.3 1.9% -2,191.3 33.4% 1,804.9
11,150.8 2.9% -6,735.8 2.6% -2,289.6 34.0% 1,921.6
11,418.6 2.4% -6,888.6 2.3% -2,421.7 35.2% 1,889.6
10,756.3 --6,542.5 --2,157.2 33.0% 1,804.6
Note: Adjusted revenues exclude reimursables and Official Check & Money Order segment. * Foreign lines of credit are not freely available for general corporate purposes.
118
December 13, 2011
High Yield
Alcatel-Lucent: 2-5s CDS flattener leverages recovery against time

Exhibit 128: Alcatel-Lucent benchmark securities & CDS
Ticker ALUFP ALUFP LU CDS Issue 8.5% Senior Euro Notes 6.45% Senior Notes Maturity 15-Jan-16 15-Mar-29 5-year GS Rating Outperform In-Line Rating B1/B B1/B Amt. 500 1,000 Price 84.06 71.75 28 pts YTW 13.9% 9.7% STW 1,317 665
We recommend investors buy 2-year Lucent CDS at 10 points up front and sell 5-year Lucent CDS at 25 points up front to create a notional neutral, DV01 positive flattener in the name. We believe the company has adequate liquidity to meet its upcoming cash needs although near-term operating risks remain high. This trade should generate attractive returns if the company can prove that its recovery remains on track and that its free cash flow can return to a positive trajectory. Conversely, if ALUs free cash trajectory deteriorates further, we believe the market could price a higher probability of a strategic restructuring ahead of its next bond maturity in June 2013. We would expect the 2-year point on the curve to flatten further hedging downside risk in the 5-year point.
Why the trade should outperform in 2012

The core of our thesis is based on the premise that 5 year CDS could rally if the company continues to grow EBITDA margins in 2012, reverses its negative free cash flow trajectory and proves to investors that its recovery plan remains on track. In this scenario, we think 5 year CDS could rally to 10 points up front or tighter (recent tights were 4 points up front) while 2 year CDS would rally to 0 points up front providing 4-5 points of net upside. We think the 2 year CDS leg of the trade is important as it should effectively hedge against the risk that the market prices in a higher probability of a strategic restructuring scenario. We think that the company has adequate liquidity to operate over the next few years, but also acknowledge that a strategic restructuring could be viewed as a higher probability if management does not improve its free cash burn in 2012. Over the past 4 years AlcatelLucent has burned an average of 820 million annually and 2012 risks are high given its 30% revenue exposure to the European region. The next major debt maturity which is the June 2013 put of the 2.875% Series B converts could serve as the key date by which management would determine its ability to continue operating under its current cost structure. We also believe that a firm bid for CDS should remain at the 2 year point as convert holders continue to hedge their credit exposure positions. If the CDS curve were to flatten in advance of the June 2013 maturity, this trade would return 13 points to investors. To be clear, we believe the company has adequate near-term liquidity and think a strategic restructuring is a low probability. However, we think this trade still offers meaningful opportunity in both upside and downside scenarios. We stress that management is currently targeting a free cash flow break-even profile for 2012 and we believe that the entire CDS curve would rally significantly if this outcome proves true. We note that the downside risk to the trade is the mark-to-market if Alcatel takes additional steps to improve its short-term liquidity, which could lead to a steepening of the curve with the 5-year refinancing risk largely unchanged.
119
December 13, 2011
High Yield

Alcatel-Lucent recently reported disappointing 3Q earnings results. Revenues declined 6.8%, reflecting a challenging European operating environment and slower US legacy network spending. More importantly, the company burned 439 million during the quarter and acknowledged that it would not meet full year targets for a 5% operating margin or positive free cash flow generation. Alcatel-Lucent ended 3Q2011 with 3.76 billion of cash on hand which should grow to 4.8 billion when the company receives the 1 billion in Genesys sale proceeds (expected around year end). The company also has access to a 1.4 billion unsecured revolver although 563 million matures April 2012 while the extended 837 million tranche matures April 2013. Looking forward, we expect Alcatel-Lucent to burn 245 million in 2012 although we expect it to generate 100-200 million in 4Q2011 its strongest cash flow quarter seasonally. The company is guiding investors to free cash flow break-even but it had done the same for 2011 and will likely burn over 500 million this year.
Company description
Alcatel-Lucent is a manufacturer of telecommunications equipment and a provider of telecommunication services. It provides products and services that enable voice, data, and video communications. Areas of focus include fixed, mobile, and converged broadband networking and IP technology. The company categorizes its business into three main segments: Networks (IP, Optics, Wireless and Wireline), Applications (Network Applications, Enterprise Applications), and Services. ALU's top 10 customers accounted for 43% of revenues in 2010, with AT&T and Verizon each accounting for 11%. The company competes with a broad number of competitors including Cisco, Ericsson, Huawei, ZTE, and Nokia Siemens Networks. The company was formed through the merger of Alcatel S.A. and Lucent Technologies in 2006.
120
December 13, 2011
High Yield
Exhibit 129: Alcatel-Lucent Financial model

IncomeStatement TotalRevenues YoYChange Seq.Change AdjustedEBITDA EBITDAMargin NetInterestExpense CashFlow AdjustedEBITDA CashInterestExpense CashTaxes ChangeinWorkingCapital Other(inclcashpension&restructuring) CashfromOperations CapitalSpending Dividends FreeCashFlow Acquisitions/Divestitures ShareIssuance/Repurchase STInvesting Debtissuance/repurchase OtherCashFlowItems Changeincash BalanceSheet Cash&Equivalents Totaldebt Netdebt CreditStats Debt/EBITDA NetDebt/EBITDA EBITDA/InterestExp. FY09 1Q10 2Q10 3Q10 4Q10 FY10 1Q11 2Q11 3Q11 4Q11E FY11E FY12E LTM Dec09 Mar10 Jun10 Sep10 Dec10 Dec10 Mar11 Jun11 Sep11 Dec11 Dec11 Dec12 Sep11 15,157 3,247 3,813 4,074 4,862 15,996 3,740 3,903 3,797 4,709 16,149 16,026 16,302 10.8% 9.8% 2.4% 10.5% 22.6% 5.5% 15.2% 2.4% 6.8% 3.1% 1.0% 0.8% N/A N/A 18.1% 17.4% 6.8% 19.3% N/A 23.1% 4.4% 2.7% 24.0% N/A 0.8% N/A 684 (18) 219 251 588 1,040 192 275 343 568 1,378 1,366 1,398 4.5% 0.6% 5.7% 6.2% 12.1% 6.5% 5.1% 7.0% 9.0% 12.1% 8.5% 8.5% 8.6% (254) (71) (77) (76) (80) (304) (72) (76) (3) (59) (210) (272) (231) 684 (244) (89) 471 (827) (5) (691) (4) (700) 1,791 0 (1,062) (223) 84 (110) (18) (121) (22) 78 (214) (297) (132) 0 (429) 0 0 384 (44) 187 98 219 (60) (46) (152) (250) (289) (146) (3) (438) 16 0 (136) (306) 242 (622) 251 (100) (61) (143) (36) (89) (184) (8) (281) 23 0 583 98 (249) 174 588 (24) 12 227 (254) 549 (230) 3 322 191 0 561 657 82 1,813 1,040 (305) (117) 10 (754) (126) (692) (8) (826) 230 0 1,392 405 262 1,463 192 (115) (20) (92) (44) (79) (134) 0 (213) 3 3 (17) (829) (191) (1,244) 275 (53) (34) (312) (94) (218) (132) (69) (419) 2 12 107 8 (32) (322) 343 (120) (11) (282) (225) (295) (141) (3) (439) 4 0 (243) (64) 227 (515) 568 (64) (15) 102 (236) 356 (221) 0 134 1,000 0 0 0 0 1,134 1,378 (352) (80) (584) (599) (236) (628) (72) (937) 1,009 15 (153) (885) 4 (947) 1,366 (376) (105) 81 (490) 476 (721) 0 (245) 0 0 0 0 0 (245) 1,398 (312) (53) (459) (617) (43) (637) (69) (749) 200 15 408 (231) 86 (271)
5,570 5,307 4,841 4,424 4,755 4,873 4,811 4,686 (815) (434) (30) 262 7.0x 1.2x 4.0x LTM Sep11 6.8x 0.6x 3.5x 6.0x 0.0x 3.8x FY11E
Book Lever. Amt Outst Book Lever.
5,689 5,689 4,457 4,028 5,378 5,378 4,361 4,427 (311) (311) (96) 399 5.2x 0.3x 4.0x 5.2x 0.3x 4.0x 3.5x 0.1x 5.0x 3.4x 0.3x 5.4x
3,757 4,891 4,891 4,646 3,757 4,498 4,498 4,498 4,498 4,498 741 (393) (393) (148) 741 3.2x 0.5x 5.5x 3.3x 0.3x 4.7x 3.3x 0.3x 4.7x 3.3x 0.1x 4.1x 3.2x 0.5x 5.5x
5.1x 0.3x 3.5x
CapitalStructure
Amt Outst
EUR1.4bnRevolvingCreditFacilitydue2012/2013 AlcatelLucent6.375%notesdue2014 AlcatelLucent5.0%convertsdue2015 AlcatelLucent8.5%seniornotesdue2016 AlcatelLucentFRNsdue20122016 AlcatelLucentUSA2.875%convertsdue2023 AlcatelLucentUSA2.875%convertsdue2025 AlcatelLucentUSA6.5%notesdue2028 AlcatelLucentUSA6.45%notesdue2029 AlcatelLucentCapitalTrust7.75%sub.prefsdue2017 TotalDebt(FaceValue) Equitycomponentofconverts Otherfinancialdebt ReportedGrossDebt Cash&Equivalents NetDebt EquityMarketCap EnterpriseValue
0 462 1,000 500 150 72 680 200 906 716 4,686 (500) 312 4,498 3,757 741 2,860 3,601
2.8x 2.8x 2.8x 2.8x 2.8x 2.8x 2.8x 2.8x 2.8x 3.4x 3.4x 3.2x 0.5x 2.6x
0 462 1,000 500 150 72 680 200 906 716 4,686 (500) 312 4,498 4,891 (393) 2,860 2,467
2.9x 2.9x 2.9x 2.9x 2.9x 2.9x 2.9x 2.9x 2.9x 3.4x 3.4x 3.3x 0.5x 1.8x
Liquidity RevolverSize BorrowBase AmtDrawn Unavailable AmtUnutilized Cash Liquidity
ProForma
SegmentRevenues
1,400 1,400 0 0 1,400 3,757 5,157
Networks IP Optics Wireless Wireline Software/Svcs/Solutions Enterprise Other

PensionFunding YE2010
62% 10% 17% 27% 9% 27% 7% 3%
DebtMaturitiesFaceValue
2012 2013 2014 2015 2016 2017 Thereafter

RevenuesbyRegion
150 680 462 1,072 500 716 1,106

FY2010
Region FVofAssets PBO FundedStatus

OPEBFunding
US Euro 23,721 3,281 (21,008) (3,712) 2,713 (431)

YE2010
NorthAmerica Europe AsiaPacific ROW
35.9% 31.8% 18.3% 14.0%
Region FVofAssets PBO FundedStatus
US 536 (3,334) (2,798)
Euro
Source: Goldman Sachs Credit Research
121
December 13, 2011
High Yield
Telecom Coverage view and recommendations

Jason Kim Goldman, Sachs & Co. jason.kim@gs.com 1-212-902-2233 Satya Tagat Goldman, Sachs & Co. satya.tagat@gs.com 1-212-902-4427 We carry a Neutral coverage view of the high yield telecom sector. We would characterize 2011 as a year of substantial re-pricing of wireless risk. At the start of the year, the enthusiasm surrounding wireless was robust, with much investor interest in any potential strategic M&A or partnerships by Sprint, and the prepaid operators growth opportunities from smartphones. Fast forward a year, and Sprints (the largest constituent in high yield telecom by far) credit profile turned out to be materially worse than previously thought, Clearwires bonds showed significant volatility (as did its relationship with Sprint), and the prepaid operators have seen intensifying competitive threats that have collectively led to the sector underperforming the market significantly. The RLECs once considered defensive have also been under pressure in 2011. This was largely driven by Frontier, which continued to face issues stabilizing its top-line trends. While the yields have widened out significantly in telecom (especially in wireless) in 2011, many of the benchmark names in the sector continue to face severe enough challenges to warrant a more constructive stance, in our view. These issues include: Sprints execution risk from its network modernization and the margin impact from the iPhone, spectrum constraints for the prepaid operators (MetroPCS in particular), continued funding needs for network upgrades, and the ever-increasing subsidies that are making the scale advantage even more apparent as the larger players are able to absorb the costs more effectively. We also expect Frontier to face additional challenges in 2012, and Windstream has to deal with integrating its acquisition of PAETEC.
Exhibit 130: HY telecom 2011 ytd total returns trailed the index by over 300 bp
Ytd total returns: HY telecom vs. HY market
Exhibit 131: Telecom companies under our coverage trade 240 bp wide to the index
Yield comparison: HY telecom vs. HY market
12.0%
HY Market 3.2%
11.0% 8.6%
10.0% 8.0% 6.0%
Telecom -0.2%
4.0% 2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
0.0% HY Market
Telecom
122
December 13, 2011
High Yield
Leap Wireless: Buy LEAP 7.75% secured notes due 2016 - benefit from asset value while insulated from earnings volatility
GS TKR LEAP LEAP Rating OP IL Size (MM) $1,100 $1,600 Coupon (%) 7.750 7.750 Priority Sr Sec Sr Nts Maturity 5/15/2016 10/15/2020 Agency Ratings Ba2/B+ B3/CCC+ Next Call Price 105.813 Date 5/15/2012 Bid Price 101.00 81.00 YTW (%) 7.41 11.19 STW (bp) 677 924
103.875 10/15/2015

We believe the LEAP secured notes represent an attractive risk-adjusted total return opportunity for investors, and we recommend buying them at 101.5 (7.2% yield/677 bp spread). We believe the bonds offer very strong asset coverage, which was recently buttressed by the AWS spectrum (which represents the majority of LEAPs spectrum holdings) transaction among Verizon Wireless and SpectrumCo (JV between Comcast, Time Warner Cable and Bright House), which had implied spectrum valuation at $0.70/MHz/POP. In Exhibit 133, we have run LEAPs asset coverage scenarios for its spectrum holdings and PP&E through the senior secured notes. The scenarios are driven by spectrum valuation ($/MHz/POP) and discounts applied to LEAPs PP&E balance as of 3Q2011. Note that $0.53 is the average price paid by LEAP and its JVs for their spectrum. In calculating the asset value, we subtracted the value of the spectrum being sold by Savary Island Wireless, LLC (LEAPs unrestricted subsidiary in which LEAP owns an 85% non-controlling interest) to VZW of $174 million. Finally, we show asset coverage without the benefit from cash balance for conservatism and to reflect the fact that LEAP burns cash to fund its LTE buildout. Even so, we find that the LEAP secured notes offer investors substantial cushion in asset value. Exhibit 133: LEAPs asset coverage through the secured notes is very strong
$, millions
Asset Value ####### $0.40 80% $1,706 70% 1,907 60% 2,108 50% 2,309 40% 2,510 30% 2,710 20% 2,911 $0.45 $1,891 2,092 2,293 2,493 2,694 2,895 3,096 $ / MHz / POP $0.50 $0.55 $0.60 $2,076 $2,260 $2,445 2,276 2,461 2,646 2,477 2,662 2,846 2,678 2,863 3,047 2,879 3,063 3,248 3,080 3,264 3,449 3,280 3,465 3,650 $0.65 $2,629 2,830 3,031 3,232 3,433 3,633 3,834 $0.70 $2,814 3,015 3,216 3,416 3,617 3,818 4,019
Asset Coverage Through LEAP SECURED Notes Excluding CASH $ / MHz / POP $0.40 $0.45 $0.50 $0.55 $0.60 $0.65 80% 155% 172% 189% 205% 222% 239% 70% 173% 190% 207% 224% 241% 257% 60% 192% 208% 225% 242% 259% 276% 50% 210% 227% 243% 260% 277% 294% 40% 228% 245% 262% 278% 295% 312% 30% 246% 263% 280% 297% 314% 330% 20% 265% 281% 298% 315% 332% 349%
PP&E Discount
$0.70 256% 274% 292% 311% 329% 347% 365%
PP&E Discount
123
December 13, 2011
High Yield
The secured notes are currently trading at 7.2% YTW to the May 15, 2015, par call date. We believe that owning these bonds offers upside optionality if LEAP attempts to refinance them sooner (see Exhibit 134 for YTC scenarios). In the past, LEAP has taken a proactive approach with respective to its maturity profile and we believe it is possible that the company would look to target the $300 million principal amount outstanding of the 10% senior notes due 2015, which become callable in July 2012. Refinancing these notes with another unsecured offering would not be practical given the trading levels of the longdated unsecured bonds (2020s) at over 11%, but we believe the asset coverage at the secured level could allow the company to reduce cost of debt and extend maturities by refinancing both the existing secured notes as well as the 10% unsecured notes. We also note that the secured notes permitted liens carveout steps down to 2.5x at the end of 2011 (vs. current leverage of 2.1x), which is more restrictive than the unsecured bonds at 3.5x which do not step down. The implication is that if LEAP decided to refinance its unsecured bonds with additional secured debt, we believe the company would look to refinance the existing secured bonds and get rid of the tighter secured debt capacity. Exhibit 134: LEAP 7.75% secured notes due 2016 yield to various call dates
CallDate 5/15/2012 5/15/2013 5/15/2014 5/15/2015 5/15/2016
CallPrice 105.813 103.875 101.938 100.000 100.000
Yield 17.72% 9.21% 7.80% 7.24% 7.34%
Spread 1,769 bp 906 bp 751 bp 677 bp 662 bp
Key risk to our view

Key risks to our views on include lower-than-expected spectrum value, macro pressure and increasing competitive threats to LEAPs prepaid business model

Overall, LEAP reported better-than-expected 3Q2011 results, highlighted by stronger ARPU and lower churn performance. Service revenues came in slightly higher than our estimates while EBITDA was essentially in line. LEAP guided towards approximately $600 million of capex in 2012, which was in line with our estimates as well. On December 5, LEAP entered into spectrum transactions with Verizon Wireless (VZW), the net result of which provide LEAP with cash proceeds of $100 million and additional spectrum holdings in its Chicago market. Specifically, LEAP agreed to purchase 12 MHz of 700 MHz A block spectrum for $204 million and to sell VZW PCS and AWS spectrum for $188 million. Additionally, LEAPs non-controlled subsidiary Savary Island agreed to sell VZW AWS spectrum for $172 million. For 2012, we look for total subscriber net adds of 520k, with 700k voice net adds offset partially by 180k net loss in data. Further, we expect churn to be 3.8%, which would be relatively unchanged yoy, and estimate 3.3 million gross adds, or up 11.6% yoy. We forecast ARPU to be $42.71 for the year (up 4.4% yoy), leading to $3.48 billion in revenues (up 11.7%).
December 13, 2011
High Yield
We expect CPGA to be $228, up 1.9% yoy, while we expect CPU to be $23.34 or up 1.7% yoy. We expect 2012 adjusted EBITDA of $680 million, up 19.7% yoy, with 19.5% margins, which is up 130 bp yoy. We estimate capex to be $603 million for the year, resulting in 2012 free cash flow burn of $155 million. Based on these estimates, we expect LEAP to end 2012 with gross/net leverage through the secured notes, unsecured notes, and holdco converts of 1.6/0.9x, 4.4x/3.7x, and 4.8x/4.1x, respectively.
Company description
Leap Wireless International, under its Cricket brand, offers wireless voice and data service in the US. Its offerings provide unlimited nationwide services for a flat rate without a contract or a credit check. Cricket service is offered by Cricket Communications, Inc., a wholly owned subsidiary of LEAP; and in South Texas by STX Wireless Operations, LLC (a joint venture in which LEAP owns a 75.75% controlling membership interest in its parent company). In addition, LEAP owns an 85% non-controlling member interest in Savary Island Wireless, LLC, which holds spectrum licenses covering the upper Midwest outside of LEAPs Chicago and Southern Wisconsin operating markets. Compared with its prepaid peer MetroPCS, LEAP markets tend to be in tier 2 and 3 cities. As of September 30, 2011, LEAP offered its Cricket service in 35 states and the District of Columbia, and had over 5.7 million subscribers. The companys network footprint in its operating markets covered approximately 95.3 million POPs. LEAP and Savary Island owned spectrum covering approximately 184.6 million POPs, with 20 MHz of spectrum in almost all of the markets in which LEAP currently operate in.
125
December 13, 2011
High Yield
Exhibit 135: Leap Wireless summary financials

($, millions)
2009A Total Subscribers (000s) YoY % Change Net Additions (000s) Acquired (Disposed) Gross Additions (000s) YoY % Change Monthly Churn Rate 1-yr Bp Change in Churn 2-yr Bp Change in Churn Total Monthly ARPU YoY % Change QoQ % Change Voice Subscribers (000s) YoY % Change Net Voice Additions (000s) Data Subscribers (000s) YoY % Change Net Data Additions (000s) Covered POP Penetration of Covered POP Revenues: Service Revenues Equipment Revenues Total Revenues YoY % Change Cost of Service Cost of Equipment Selling & Marketing General & Administrative Adjusted EBITDA EBITDA Margin YoY % Change CPGA YoY % Change CPU YoY % Change Cash Flow from Operations Less: Capital Expenditures FCF = CFO - Capex FCF % Debt EBITDA Less: Cash Interest Expense Less: Cash Taxes Less: Changes in Working Cap Less: Capital Expenditures EBITDA-Int-Tax+WK-Capex BALANCE SHEET SUMMARY Cash and Cash Equivalents Short-Term Investments Total Cash & ST Investments Opco Secured Debt Senior Secured Bank Debt Senior Secured Notes Secured Debt Senior Notes Senior Debt Holdco Converts Total Debt Coverage EBITDA / Interest (EBITDA-Capex) / Interest GROSS LEVERAGE Secured Debt / EBITDA Senior Notes / EBITDA Holdco Converts / EBITDA NET LEVERAGE Secured Debt / EBITDA Senior Notes / EBITDA Holdco Converts / EBITDA LEAP EQUITY Share Price Shares Outstanding Equity Market Capitalization Net Debt Total Enterprise Value TEV / LTM EBITDA TEV / Subscriber 4,954 28.9% 1,109 (0) 3,500 40.7% 4.5% 55 bp 17 bp $40.31 (7.5%) -4,489 20.9% 777 465 NM 332 94.2 5.3% $2,171 239 $2,410 23.0% 633 561 405 326 $486 20.1% 17.4% $196 5.0% $18.27 (13.7%) 284 (700) ($415) (15.0%) 486 (222) (2) 15 (700) ($424) 175 389 $564 18 1,100 1,118 1,400 2,518 250 $2,768 2.3x (1.0x) 2.3x 5.2x 5.7x 1.1x 4.0x 4.5x 12/31/09 $17.55 78 $1,361 2,204 $3,564 7.3x $720 2010A 5,518 11.4% 242 323 3,219 (8.0%) 4.7% 25 bp 80 bp $37.76 (6.3%) -4,970 10.7% 159 548 17.7% 83 95.3 5.8% $2,483 215 $2,697 11.9% 837 592 409 334 $525 19.5% 8.2% $199 1.6% $19.22 5.2% 312 (399) ($87) (3.0%) 525 (244) (3) 72 (399) ($48) 351 68 $419 46 1,100 1,146 1,500 2,646 250 $2,896 2.2x 0.5x 2.2x 5.0x 5.5x 1.4x 4.2x 4.7x 12/31/10 $12.26 78 $962 2,476 $3,438 6.5x $623 1Q11A 5,849 8.3% 331 852 (24.8%) 3.1% (140 bp) (20 bp) $39.35 3.4% 3.2% 5,271 11.3% 300 578 (12.8%) 30 95.3 6.1% $678 102 $780 14.1% 235 230 110 92 $112 14.4% (8.5%) $192 12.6% $23.04 31.7% 72 (93) ($21) (0.7%) 112 (21) (0) (93) ($2) 281 113 $394 46 1,100 1,146 1,500 2,646 250 $2,896 2.1x 0.5x 2.2x 5.1x 5.6x 1.5x 4.4x 4.9x 3/31/11 $15.47 79 $1,218 2,502 $3,719 7.2x $636 2Q11A 5,746 8.7% (103) 623 (8.8%) 4.2% (80 bp) (20 bp) $40.15 6.5% 2.0% 5,300 13.6% 29 446 (28.4%) (132) 95.3 6.0% $704 56 $761 14.0% 244 183 87 86 $161 21.1% (6.6%) $251 16.5% $21.83 24.0% 30 (93) ($64) (1.9%) 161 (81) (3) (93) ($17) 508 216 $724 30 1,100 1,130 1,900 3,030 250 $3,280 2.1x 0.5x 2.2x 6.0x 6.5x 0.8x 4.6x 5.1x 6/30/11 $16.23 79 $1,277 2,556 $3,833 7.6x $667 3Q11A 5,755 13.1% 10 666 3.3% 3.8% (170 bp) (160 bp) $41.25 11.1% 2.7% 5,373 19.6% 74 382 (35.8%) (64) 95.3 6.0% $717 46 $763 19.6% 255 190 79 84 $154 20.2% 25.2% $238 8.7% $23.09 15.8% 166 (103) $63 1.9% 154 (21) (1) (103) $29 425 375 $800 30 1,100 1,130 1,900 3,030 250 $3,280 2.1x 0.6x 2.1x 5.7x 6.1x 0.6x 4.2x 4.6x 9/30/11 $6.91 79 $544 2,480 $3,024 5.7x $525 4Q11E 5,905 7.0% 150 815 7.4% 3.8% (20 bp) (90 bp) $41.83 9.7% 1.4% 5,573 12.1% 200 332 (39.4%) (50) 95.3 6.2% $737 80 $816 15.3% 248 237 106 86 $141 17.2% 31.3% $225 7.9% $23.32 7.1% 33 (170) ($137) (4.2%) 141 (111) 2 (170) ($139) 279 375 $655 22 1,100 1,122 1,900 3,022 250 $3,272 2.3x 0.4x 2.0x 5.3x 5.8x 0.8x 4.2x 4.6x 12/31/11 $9.36 79 $737 2,617 $3,354 5.9x $568 2011E 5,905 7.0% 387 2,956 (8.2%) 3.7% (99 bp) (74 bp) $40.91 8.4% -5,573 12.1% 603 332 (39.4%) (216) 95.3 6.2% $2,836 284 $3,120 15.7% 983 840 381 349 $568 18.2% 8.1% $224 12.7% $22.96 19.4% 302 (460) ($158) (4.8%) 568 (235) (3) 2 (460) ($128) 279 375 $655 22 1,100 1,122 1,900 3,022 250 $3,272 2.3x 0.4x 2.0x 5.3x 5.8x 0.8x 4.2x 4.6x 12/31/11 $9.36 79 $737 2,617 $3,354 5.9x $568 1Q12E 6,205 6.1% 300 918 7.7% 3.4% 30 bp (110 bp) $42.31 7.5% 3.4% 5,923 12.4% 350 282 (51.2%) (50) 95.3 6.5% $772 97 $869 11.5% 265 262 122 95 $125 14.4% 11.1% $226 17.5% $24.00 4.2% 128 (148) ($20) (0.6%) 125 (15) 16 (148) ($22) 260 375 $635 22 1,100 1,122 1,900 3,022 250 $3,272 2.3x 0.3x 1.9x 5.2x 5.6x 0.8x 4.1x 4.5x 3/31/12 $9.36 79 $737 2,637 $3,374 5.8x $544 2Q12E 6,255 8.9% 50 816 31.1% 4.1% (10 bp) (90 bp) $42.38 5.5% 0.2% 6,023 13.7% 100 232 (48.0%) (50) 95.3 6.6% $796 66 $862 13.3% 277 201 117 89 $178 20.6% 10.6% $240 (4.2%) $22.38 2.5% 49 (151) ($101) (3.1%) 178 (111) (20) (151) ($104) 158 375 $533 22 1,100 1,122 1,900 3,022 250 $3,272 2.3x 0.1x 1.9x 5.1x 5.5x 1.0x 4.2x 4.6x 6/30/12 $9.36 79 $737 2,738 $3,475 5.8x $556 3Q12E 6,225 8.2% (30) 663 (0.5%) 3.7% (10 bp) (180 bp) $42.41 2.8% 0.1% 6,043 12.5% 20 182 (52.4%) (50) 95.3 6.5% $797 60 $857 12.3% 291 184 81 87 $214 25.0% 39.0% $219 (8.2%) $23.21 0.5% 166 (151) $15 0.5% 214 (15) (35) (151) $13 173 375 $548 22 1,100 1,122 1,900 3,022 250 $3,272 2.6x 0.1x 1.7x 4.6x 5.0x 0.9x 3.8x 4.1x 9/30/12 $9.36 79 $737 2,723 $3,460 5.3x $556 4Q12E 6,425 8.8% 200 902 10.7% 3.7% (10 bp) (30 bp) $42.46 1.5% 0.1% 6,273 12.6% 230 152 (54.2%) (30) 95.3 6.7% $809 87 $896 9.8% 282 242 120 88 $163 18.2% 15.8% $227 0.8% $23.09 (1.0%) 104 (153) ($49) (1.5%) 163 (111) 50 (153) ($51) 116 375 $491 13 1,100 1,113 1,900 3,013 250 $3,263 2.7x 0.3x 1.6x 4.4x 4.8x 0.9x 3.7x 4.1x 12/31/12 $9.36 79 $737 2,772 $3,509 5.2x $546 2012E 6,425 8.8% 520 3,299 11.6% 3.8% 1 bp (98 bp) $42.71 4.4% -6,273 12.6% 700 152 (54.2%) (180) 95.3 6.7% $3,174 310 $3,484 11.7% 1,115 890 441 359 $680 19.5% 19.7% $228 1.9% $23.34 1.7% 448 (603) ($155) (4.7%) 680 (252) 11 (603) ($164) 116 375 $491 13 1,100 1,113 1,900 3,013 250 $3,263 2.7x 0.3x 1.6x 4.4x 4.8x 0.9x 3.7x 4.1x 12/31/12 $9.36 79 $737 2,772 $3,509 5.2x $546 2013E 6,775 5.4% 350 3,325 0.8% 3.8% 0 bp 1 bp $43.06 0.8% -6,775 8.0% 502 (100.0%) (152) 95.3 7.1% $3,418 332 $3,751 7.6% 1,206 940 453 363 $789 21.0% 16.1% $234 2.4% $23.28 (0.3%) 547 (624) ($77) (2.4%) 789 (251) 1 (624) ($86) 30 375 $406 5 1,100 1,105 1,900 3,005 250 $3,255 3.1x 0.7x 1.4x 3.8x 4.1x 0.9x 3.3x 3.6x 12/31/13 $9.36 79 $737 2,849 $3,586 4.5x $529
126
December 13, 2011
High Yield
Frontier: Margin for error becoming even smaller in 2012 sell FTR 8.5% senior notes due 2020
GS TKR FTR FTR Rating U U Size (MM) $1,100 $945 Coupon (%) 8.500 9.000 Priority Sr Nts Sr Nts Maturity 4/15/2020 8/15/2031 Agency Ratings Ba2/BB Ba2/BB NC NC Next Call Price Date NC NC Bid Price 97.88 90.50 YTW (%) 8.86 10.12 STW (bp) 708 754 CDS Levels Frontier Communications 5-Year Pts Upfront 9 / 11

We recommend investors sell the FTR 8.5s of 2020, which we rate Underperform. We believe the bonds will continue to be under pressure in 2012 as the market increasingly focuses on sluggish top-line trends as opposed to synergies. We estimate that after all of its cash expenditures (including items that FTR excludes from its free cash flow definition), FTR will have generated just $90 million of cash flow after paying almost $750 million in dividends in 2011. As we look to the drivers of cash flow in 2012, we believe FTRs dividend payout ratio including all of the cash expenditures could exceed 100% at the current dividend rate. The core of our cautious thesis on FTR remains the companys revenue trends. Thus far, stabilizing the top-line decline has proven to take longer and be costlier than managements expectations since the closing of the Verizon access lines deal in mid-2010. In addition, we find that FTRs EBITDA excluding synergies continues to show significant reverse operating margin year over year. Exhibit 137 shows these metrics in recent quarters, revealing that FTR has been losing more than a dollar of EBITDA excluding synergies on a dollar of year-over-year decline. We believe this is the result of the very high incremental margins associated with the lost revenue streams of the legacy access line business as well as additional spending that is required of FTR to protect the revenue trends from deteriorating even further. Given our expectation for $265 million of absolute dollar decline in revenues in 2012, we believe EBITDA will continue to decline as well despite FTR realizing an additional $150 million from synergies. Finally, we estimate FTR will pay minimal cash taxes in 2011, a level that will only go higher in 2012. Exhibit 137: FTRs EBITDA excluding synergies incremental margin trends
($, millions)
Revenues EBITDA Synergies EBITDA ex Synergies 2Q10A $1,434 655 655 3Q10A $1,403 671 63 608 4Q10A $1,359 622 76 546 1Q11A $1,347 626 92 534 2Q11A $1,322 634 106 528 3Q11A $1,291 609 124 485
Exhibit 138: We believe FTRs dividend payout ratio could exceed 100% including integration capex/costs
($, millions)
2011E $2,469 (669) 0 (2) (767) (123) (73) $836 (746) $90 89.3% 2012E $2,370 (642) (150) (0) (720) (80) (40) $738 (746) ($8) 101.1% YoY$Chg ($99) 27 (150) 1 47 43 33 ($98) 0 ($98)
YoY Revenue Change ($107) ($111) ($95) ($109) ($112) ($112) YoY EBITDA Change (90) (65) (101) (71) (21) (62) YoY EBITDA Ex Synergies Chg (90) (128) (177) (163) (127) (123) EBITDA Ex. Synergies Margin 45.7% 43.3% 40.2% 39.7% 39.9% 37.6% EBITDA Ex. Synergies (84.1%) (115.3%) (186.3%) (148.7%) (113.9%) (109.6%) Incremental Margin
AdjustedEBITDA Less :CashInterestExpense Less :CashTaxes Less :ChangesinWorkingCapital Less :CapitalExpenditures Less :Other(IntegrationCosts,SBC) Less :IntegrationCapex FreeCashFlow Less :Dividends FreeCashFlowPostDividends DividendPayoutRatio
FTR's EBITDA margins excluding synergies have shown significant reverse operating leverage since closing of the VZ deal
Source: Company data, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
127
December 13, 2011
High Yield
Key risks to out view

Key upside risks to our views on FTR include better-than-expected top-line trends and significant beat in synergies.

FTR reported weaker-than-expected 3Q2011 results, which continued to show lackluster top-line trends and reverse incremental margin trends excluding synergies on the EBITDA line. Total revenues declined 8.0% yoy to $1.29 billion, while adjusted EBITDA fell 9.2% yoy to $609 million. The company reported access line losses of 5.9% yoy in its legacy markets and losses of 9.8% yoy in its acquired VZ markets (vs. our expectations of -5.9% and -9.4%, respectively). Total access line losses of 8.5% were also slightly worse than our expectations of 8.2%. Data net adds was one bright spot, with 14k for the quarter, which was ahead of our expectations of 11k net adds. On October 14, FTR announced the completion of a $575 million senior unsecured amortizing term loan maturing October 14, 2016. The term loan's initial pricing is Libor + 287.5 bp and the maximum permitted leverage ratio is 4.5x. Proceeds from the issuance were used to repay the following debt: $200 million outstanding on its Rural Telephone Financing Cooperative term loan due October 24, 2011; $143 million outstanding on its term loan due December 31, 2012; and $131 million outstanding on its term loan due December 31, 2013. The remainder (about $100 million) will be used for general corporate purposes. In 2012, we expect FTR to post a full-year access line loss rate of 7.4% driven by a 6.0% loss in legacy FTR and an 8.3% loss in acquired VZ. We forecast total revenues of $4.97 billion, representing 5.1% yoy decline. We look for adjusted EBITDA of $2.37 billion, down 4.0% yoy. If the current dividend rate is maintained, then we project that FTR will essentially be cash flow breakeven after dividends in 2012. Based on our estimates, we expect FTR to end 2012 with 3.4x net leverage.
Company description
Frontier Communications Corporation is the largest pure rural telecommunications carrier and the fifth-largest Incumbent Local Exchange Carrier in the United States. Frontiers services include voice, high-speed Internet, satellite video (through agreements with DISH and DIRECTV), wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications Access Solutions for medium and large businesses. Frontier operates in 27 states with approximately 15,250 employees.
128
December 13, 2011
High Yield
Exhibit 139: Frontier summary financials

($, millions)
2009A Access Lines ('000s) Residential Access Lines Business Access Lines Total Access Lines Data Subscribers Video Subscribers YoY % Change Residential Access Lines Business Access Lines Total Access Lines Data Subscribers Video Subscribers Sequential Net Adds ('000s) Residential Business Total Access Lines Data Subscribers Video Subscribers Revenues: Local and Long Distance Services Data and Internet Services Switched Access and Subsidy Directories and Other Revenues YoY % Change YoY % Change - Pro Forma for VZ Top-Down EBITDA Severance & Other Pension Expenses Adjusted EBITDA EBITDA Margin YoY % Change YoY % Change - Pro Forma for VZ Cash Flow from Operations Less: Capital Expenditures (Ex. Integration) FCF = CFO - Capex FCF % Debt Less : Integration Capex Less : Dividends Less: Share Repurchases FCF - Sh. Repurchases - Dividends FCF Post Div and Sh Rep % Debt LTM Capex as % of LTM Revenues Dividends as % of FCF Dividends as % of Co. Defined FCF Adjusted EBITDA Less: Cash Interest Expense Less: Cash Taxes Less: Changes in Working Capital Less: Capital Expenditures Less: Other (Integration Costs, SBC, etc) EBITDA-Int-Tax+WK-Capex Less : Integration Capex Less: Dividends Less: Share Repurchases EBITDA-Int-Tax+WK-Capex-Div-Sh Rep BALANCE SHEET SUMMARY Cash & Cash Equivalents Revolver Subsidiary Secured Term Loan Unsecured Term Loans Sr Notes and Debentures Subsidiary Sr Notes Capital Lease Obligations Other Debt Total Debt Coverage EBITDA / Interest (EBITDA-Capex) / Interest Gross Leverage Net Leverage FTR EQUITY Share Price Shares Outstanding Equity Market Capitalization Net Debt Total Enterprise Value TEV / LTM EBITDA 1,350 768 2,118 636 173 (7.2%) (4.0%) (6.1%) 9.7% 44.2% (105) (32) (137) 56 53 947 637 360 174 $2,118 (5.3%) -$1,111 4 34 $1,149 54.2% (5.4%) -743 (231) $512 10.5% (25) (312) $174 3.6% 10.9% 61.0% 63.6% 1,149 (364) (60) (10) (231) (23) $462 (25) (312) $124 $359 200 278 4,341 36 29 $4,884 3.0x 2.4x 4.2x 3.9x 12/31/09 $7.81 312 $2,439 4,525 $6,965 6.1x 2010A 3,636 2,110 5,746 1,697 531 NM NM NM NM NM NM NM NM NM NM 1,797 1,236 498 267 $3,798 79.3% (6.9%) $1,803 10 40 $1,853 48.8% 61.3% (10.9%) 1,222 (481) $741 8.9% (97) (529) $115 1.4% 12.7% 71.4% 63.2% 1,853 (511) (20) 23 (481) (133) $731 (97) (529) $104 $251 200 275 7,791 36 0 25 $8,327 3.6x 2.6x 3.1x 3.0x 12/31/10 $9.73 994 $9,670 8,076 $17,746 6.7x 1Q11A 3,522 2,087 5,609 1,708 546 NM NM NM NM NM (114) (23) (137) 11 15 635 459 166 87 $1,347 159.1% (7.5%) $615 0 11 $626 46.5% 123.1% (10.1%) 514 (204) $311 3.7% (6) (187) $118 1.4% 13.9% 60.1% 73.8% 626 (119) (9) 67 (204) (10) $352 (6) (187) $160 $359 200 275 7,791 36 0 25 $8,326 3.7x 2.6x 3.2x 3.1x 3/31/11 $8.22 995 $8,181 7,967 $16,147 6.3x 2Q11A 3,429 2,061 5,490 1,715 554 NM NM NM NM NM (93) (26) (119) 7 8 618 462 158 85 $1,322 156.2% (7.8%) $618 11 5 $634 47.9% 127.4% (3.2%) 350 (211) $140 1.7% (13) (187) ($60) (0.7%) 14.8% 133.7% 80.6% 634 (210) (18) (72) (211) (27) $96 (13) (187) ($104) $233 200 274 7,715 36 0 24 $8,249 3.8x 2.6x 3.2x 3.1x 6/30/11 $8.07 995 $8,032 8,016 $16,048 6.3x 3Q11A 3,345 2,029 5,374 1,729 557 (10.5%) (5.2%) (8.5%) 2.1% 7.9% (84) (32) (116) 14 2 606 458 148 79 $1,291 (8.0%) (8.0%) $600 4 6 $609 47.2% (9.3%) (9.2%) 408 (223) $186 2.3% (44) (187) ($44) (0.5%) 16.3% 100.4% 70.7% 609 (119) 43 53 (223) (68) $296 (44) (187) $66 $206 200 273 7,715 36 24 $8,248 3.7x 2.4x 3.3x 3.2x 9/30/11 $6.11 995 $6,080 8,042 $14,122 5.7x 4Q11E 3,271 2,012 5,283 1,748 571 (10.0%) (4.6%) (8.0%) 3.0% 7.4% (74) (17) (90) 19 14 588 458 143 83 $1,272 (6.4%) (6.4%) $581 3 15 $599 47.1% (3.7%) (3.6%) 295 (130) $165 2.0% (10) (187) ($32) (0.4%) 14.7% 113.4% 62.4% 599 (221) (16) (50) (130) (19) $164 (10) (187) ($33) $275 575 7,715 36 24 $8,350 3.7x 2.6x 3.4x 3.3x 12/31/11 $5.34 995 $5,314 8,074 $13,388 5.4x 2011E 3,271 2,012 5,283 1,748 571 (10.0%) (4.6%) (8.0%) 3.0% 7.4% (364) (98) (462) 51 40 2,446 1,836 615 334 $5,232 37.8% (7.4%) $2,414 18 38 $2,469 47.2% 33.2% (6.7%) 1,567 (767) $801 9.6% (73) (746) ($18) (0.2%) 14.7% 93.2% 71.3% 2,469 (669) 0 (2) (767) (123) $909 (73) (746) $90 $275 575 7,715 36 24 $8,350 3.7x 2.6x 3.4x 3.3x 12/31/11 $5.34 995 $5,314 8,074 $13,388 5.4x 1Q12E 3,189 1,999 5,188 1,771 598 (9.5%) (4.2%) (7.5%) 3.7% 9.4% (83) (13) (95) 23 27 568 469 150 82 $1,269 (5.8%) -$594 2 10 $606 47.7% (3.3%) -460 (180) $280 3.4% (10) (187) $84 1.0% 14.4% 66.6% 79.9% 606 (101) (38) 12 (180) (20) $280 (10) (187) $83 $345 561 7,715 36 23 $8,335 3.8x 2.6x 3.4x 3.3x 3/31/12 $5.34 995 $5,314 7,990 $13,304 5.4x 2Q12E 3,105 1,974 5,079 1,780 600 (9.4%) (4.2%) (7.5%) 3.8% 8.3% (84) (25) (109) 9 3 556 474 143 82 $1,255 (5.1%) -$587 2 10 $599 47.8% (5.4%) -318 (180) $138 1.7% (10) (187) ($59) (0.7%) 14.0% 135.2% 82.1% 599 (222) (38) (3) (180) (20) $137 (10) (187) ($59) $271 546 7,715 36 23 $8,320 3.7x 2.6x 3.4x 3.3x 6/30/12 $5.34 995 $5,314 8,049 $13,363 5.5x 3Q12E 3,029 1,944 4,973 1,795 603 (9.4%) (4.2%) (7.5%) 3.8% 8.3% (76) (30) (106) 14 2 545 471 134 82 $1,232 (4.6%) -$574 2 10 $586 47.6% (3.8%) -429 (180) $249 3.0% (10) (187) $52 0.6% 13.3% 75.0% 87.2% 586 (98) (38) (2) (180) (20) $248 (10) (187) $52 $309 532 7,715 36 23 $8,306 3.7x 2.7x 3.5x 3.3x 9/30/12 $5.34 995 $5,314 7,997 $13,311 5.6x 4Q12E 2,963 1,927 4,890 1,808 618 (9.4%) (4.2%) (7.4%) 3.4% 8.3% (66) (16) (83) 13 16 530 470 129 82 $1,211 (4.9%) -$567 2 10 $579 47.8% (3.5%) -294 (180) $114 1.4% (10) (187) ($83) (1.0%) 14.5% 164.2% 90.2% 579 (221) (38) (7) (180) (20) $113 (10) (187) ($84) $175 518 7,715 23 $8,255 3.7x 2.6x 3.5x 3.4x 12/31/12 $5.34 995 $5,314 8,080 $13,394 5.7x 2012E 2,963 1,927 4,890 1,808 618 (9.4%) (4.2%) (7.4%) 3.4% 8.3% (309) (85) (393) 60 47 2,199 1,884 556 328 $4,967 (5.1%) -$2,322 8 40 $2,370 47.7% (4.0%) -1,501 (720) $781 9.5% (40) (746) ($6) (0.1%) 14.5% 95.6% 84.6% 2,370 (642) (150) (0) (720) (80) $778 (40) (746) ($8) $175 518 7,715 23 $8,255 3.7x 2.6x 3.5x 3.4x 12/31/12 $5.34 995 $5,314 8,080 $13,394 5.7x 2013E 2,693 1,854 4,547 1,859 661 (9.1%) (3.8%) (7.0%) 2.8% 6.9% (269) (74) (343) 51 43 2,000 1,924 504 317 $4,745 (4.5%) -$2,235 8 40 $2,283 48.1% (3.7%) -1,508 (600) $908 11.4% (746) $162 2.0% 12.6% 82.2% 80.9% 2,283 (635) (147) (6) (600) 12 $907 (746) $161 $20 322 460 7,134 22 $7,938 3.6x 2.7x 3.5x 3.5x 12/31/13 $5.34 995 $5,314 7,918 $13,232 5.8x
3Q10-1Q11 leverage and EV/EBITDA ratios are pro forma for the acquisition of the Verizon access lines in 14 states. Source: Goldman Sachs Credit Research.
129
December 13, 2011
High Yield
Transportation: Airlines: Coverage view and recommendations

Justine Fisher Goldman, Sachs & Co. justine.fisher@gs.com 1-212-357-6711 Joshua Pinkerton Goldman, Sachs & Co. joshua.pinkerton@gs.com 1- 212-357-9774 We have a Neutral coverage view on the Airlines/EETC sector for 2012, as we view both fundamentals and technicals as balanced.
We view airline industry fundamentals as balanced for 2012

Airlines: Capacity cuts and manageable fuel should offset a weaker economic environment. The outlook for passenger yield growth appears challenged, with our
economists forecasting a mild recession in Europe and 1.5% GDP growth in the US. With load factors at peak levels and capacity forecasts flat to down, 2012 PRASM growth will have to be driven mostly by yield improvement. This was the case during 2010 and 2011 because capacity cuts took out a lower-paying segment of the flying public, leaving higherpaying passengers flying and thereby raising average yields. This could happen again in 2012, but we think it is unlikely in light of (1) the high level of unemployment, which we expect to affect leisure travel, (2) macroeconomic conditions, which we expect to affect corporate travel budgets, and (3) the scale of planned capacity cuts of flat to down 1%. We think capacity cuts would have to be more significant (perhaps down 3%-5%) in order to cut out a large enough swathe of the market to drive yields up significantly again. We are
forecasting flat yoy PRASM for 2012.

Offsetting this subdued outlook for revenues are two factors that should help the industry perform fine (though not spectacularly) in an economic environment that would otherwise give us a more cautious stance. 1.
Capacity cuts. Most US carriers, with the exception of JetBlue and Alaska (two of the
smallest carriers) are projecting flat to down capacity for 2012 (US Airways capacity should be up less than 1%). With 3Q PRASM growth of 6%-11% for US carriers and 4Q PRASM growth trending in the high-single digits, these capacity cuts may appear premature. However, we think they are appropriate in light of the GDP outlook, and they should help keep PRASM performance about flat for the year.
Exhibit 140: JetBlue and Alaska are the only carriers increasing capacity by more then 2% in 2012
UAL DAL AMR LUV LCC JBLU ALK AirCanada
2012Capacityplans Flat Down23% Flattodown Flattodown Uplessthan1% Midsingledigit Up5% Uplessthan1.5%
2012ASMs(billions) 251.9 228.8 164.8 128.3 87.0 39.0 27.9 67.2
2.
Manageable fuel costs. Lower jet fuel prices could be the silver lining of a weaker
economic environment for the airlines. While our $3.10/gallon forecast for jet fuel (roughly $110-$115/bbl for Brent crude, plus a $15/bbl crack spread and a few cents/gallon for hedging costs) is not low by historical standards, we think it is manageable for US carriers in light of our revenue expectations. Our colleagues in commodities research expect Brent crude to reach $126/bbl by year-end 2012. We use
130
December 13, 2011
High Yield
the forward curve in our models because airline securities tend to trade on the forward curve, but note that the risk to fuel prices is to the upside based on the commodities teams forecast. Airlines have begun to roll in hedges for 2012, and we expect them to be roughly 50% hedged in 2012 once their hedge programs are complete. However, most hedges are around market levels, so we are not expecting a significant cost benefit from these hedging programs unless we see a notable spike in fuel next year.
Exhibit 141: Airlines continue their hedge programs, but not seeing notable cost advantages from them
2012Guidance 4QGuidance %hedged Pricehedgedat Expected4qPrice %hedged UAL $3.16 56% $3.23 $3.15 34%for1H DAL $3.09 "Substantial" $2.98 40%1H,1520%2H AMR $3.15 52% $3.01 22% LCC $3.14 0% $3.103.15 0% LUV*** $3.18 ~45% $3.30 20%1H,5070%2H JBLU $3.25 45% $3.23 21% AirCanada C$0.86/litre 34% $110/bbl 9% ***LUVishedgedatdifferentpercentagesatdifferentWTIprices,sopercentageisapproximate LUVisalsohedgedover50%for2013,over40%for2014,andover10%for2015
3QActual
Lessors should benefit from solid global demand for aircraft and financing market share gain
Expect solid results on the heels of global demand for aircraft. Similar to 2011, we think lessors are well-positioned for 2012 compared with airlines, as they are more geographically diversified, have longer-term lease contracts, and much less exposure to volatile fuel prices. While lessee defaults in Europe could rise, we expect these aircraft to be re-leased relatively quickly because of strong global aircraft demand. Continued support from the US Export-Import Bank, European Export Credit Agencies, and Asian banks should support the aircraft orderbook. European lending retraction holds risks, but also market share benefits, for lessors. Lessors face risk from a contraction of European bank lending to the sector because European banks are key providers of capital to them. However, warehouse and secured facilities that have already been closed, private equity capital, and the public capital markets should keep lessors with access to sufficient sources of capital. We also expect the bank lending that persists through the current crisis to favor lessors because of their size, diversification, and assets.
On the positive side, lessors may be able to use other sources of capital to take market share from European banks, stepping in to do sale-leasebacks or other deals to finance aircraft for airlines
Technicals should be solid after AMR bankruptcy

AMR bankruptcy removes a negative technical from the market; new issuance would be primarily for new aircraft deliveries. AMR Corporations bankruptcy filing on
December 13, 2011
High Yield
November 29 removed a significant negative technical from the airline/EETC sector in 2012. While we have not seen the bonds of other airlines trade down following the AMR bankruptcy, we think that continued headline risk during 2012 might have pressured the sector, and weakness in AMR bonds may have offset solid performances from the bonds of other carriers.
We now expect technicals to be relatively solid for the sector this year barring a significant rise in fuel costs. Now that AMR has filed for bankruptcy (which eliminates its
need to refinance its 10.5% secured bonds), we expect minimal deals required for debt refinancing a deal from Southwest Airlines to refinance its 6.5% unsecured bonds that mature in 1Q2012 is essentially the only large refinancing we anticipate. Delta and United each have relatively small amounts of EETC debt maturing in 2012 Delta has $370 million of its 6.417% bonds maturing, while United has $172 million of its 12.75% spare parts deal maturing. We think these are manageable amounts, and given that both of these carriers have said that they hope to repay some debt with cash in order to de-lever, we think they could be repaid partly with cash. The more significant new issuance we might expect would be for new aircraft deliveries for United (taking delivery of 19 737-900ERs and 5 787s), US Airways (taking delivery of 12 A321s and several A330s), or possibly Southwest (taking delivery of 33 737s in 2012). We expect the market to absorb any new aircraft-backed bonds well owing to solid fundamentals in the aircraft market.
Lessors: Top pick because of more predictable results, less concentrated risk
Size TKR ILFC ILFC AWAS AYR (MM) $500 $1275 $542 $300 Coupon (%) 8.875 7.125 7.000 9.750 Priority Sr. Unsec. Sr. Secured Sr. Secured Sr. Unsec. Maturity 01-Sep-17 01-Sep-18 15-Dec-16 01-Aug-18 Agency Ratings B1/BBBBa3/BBBBa2/BBBBa3/BB+ Next Call Price MW MW 103.50 104.88 Date MW MW 18-Oct-13 01-Aug-14 Bid Price 100.25 101.50 100.75 104.00 YTW (%) 8.813 6.841 6.759 8.685 ZSPRD (bp) 738 521 560 748
We continue to see more operating risk in the airlines than in the lessors because of their more-limited geographic scope and higher vulnerability to fuel prices. In general, lessors results are more predictable than the airlines. Lessors have long term contracts and only renew 10%-20% of their leases each year, which helps to spread any changes in revenue over several years. They have geographic diversity that limits their exposure to weakness in any one region, and they have the ability to repossess and reposition aircraft in the event of a customer default. Security deposits help cover the cost of transitioning an aircraft that is returned early. In fact, the early lease terminations that our companies reported this year have had limited financial impact because of security deposits and robust demand from other customers. Lessors have no direct exposure to volatile input costs such as fuel.
132
December 13, 2011
High Yield
Lessors have no potentially disruptive labor negotiations or high legacy liabilities/pension costs.
With the uncertain economic outlook over the next year we view this stability as a key benefit for the lessors. We think the bonds of very large lessors are most attractive in this environment owing to market share. AWAS secured bonds trade at a 6.8% yield, which we view as fair for these bonds, but attractive versus EETC A tranches in the same range. We think Aircastle bonds at roughly 9.3% reflect fair value versus other unsecured leasing bonds and junior EETC tranches. The biggest risks to the lessors would be a significant deterioration in the global economy that causes a number of airlines to default, aircraft values to decline and credit markets to freeze up, preventing the lessors from refinancing their debt.
Post-2009 B tranches: Higher yields with less risk of rejection

GS TKR LCC UAUA CAL CAL DAL DAL DAL Rating IL OP NC NC NC NC NC Size (MM) $73 $96 $98 $64 $84 $135 $100 Coupon (%) 8.500 12.000 9.250 6.000 9.750 6.750 6.375 Priority 2010-1B 2009-2B 2009-2B 2010-1B 2009-1B 2010-2B 2010-1B Maturity 22-Apr-17 15-Jan-16 10-May-17 12-Jan-19 17-Dec-16 23-Nov-15 02-Jan-16 Agency Ratings B+/B2 Ba2/B+ Ba2/BBBBa2/BBBBa2/BBBBa3/BB Ba3/BB+ Bid Price 95.000 105.000 100.000 92.000 103.000 91.000 90.000 YTW (%) 10.257 9.582 9.244 8.698 8.643 9.540 9.399 ZSPRD (bp) 844 949 796 580 780 858 841
We view post-2009 B tranches as some of the most attractive bonds in the HY airline sector. Post-2009 B tranches benefit from cross-collateralization, and with at least some essential aircraft in all of these deals, we believe airlines would affirm the entire deal (including Bs). Granted, B tranches tend to be smaller and less liquid than As (only $96.2 million outstanding of the UAL 12s). At higher yields (10.36% YAL for the UAL 12s), we believe they offer attractive opportunities in the aviation space. We view post-2009 B-tranches such as the DAL 9.75% of 2016 (8.34%) and CAL 9.25% of 2017 (9.43%) as similarly attractive to the UAL 12s. Investors willing to extend to lower quality unsecured credits in exchange for higher yield could also consider the LCC 9.75% of 2018 (11.00%) or the LCC 8.5% of 2010 (10.38%). The biggest risk to these bonds is an aggressive decline in the aviation market that both raises the risk of default for these airlines and would potentially cause them to cut much more capacity than we anticipate at this time, which would increase the likelihood of aircraft in these deals being rejected.
133
December 13, 2011
High Yield
Routes/Slots deals: Uncertain claim on collateral makes it hard to get comfortable at current yields
GS TKR UAL DAL ACACN CAL Rating NC U OP NC Size (MM) $450 $676 $600 $800 Coupon (%) 9.875 9.500 9.250 6.750 Priority 1st lien 1st lien 1st lien 1st lien Maturity 01-Aug-13 15-Sep-14 01-Aug-15 15-Sep-15 Agency Ratings Ba3/BBBa2/BBB1/B+ Ba2/BBBid Price 101.000 100.500 86.000 94.000 YTW (%) 8.906 9.168 14.317 8.651 ZSPRD (bp) 829 894 1344 774
We view routes/slots as more tenuous collateral than aircraft, and prefer A tranches (especially the post-2009 CAL and UAL deals) that trade only slightly tighter than 7%. The AMR 7.5s have already traded weakly during bankruptcy on the heels of market concerns about the lack of a perfected lien and whether that might put the security of the bonds at risk. Also, updated valuations on the AMR routes/slots assets post-bankruptcy put the collateral value at $1.5 billion versus an initial appraisal of $2.4 billion. If the AMR bankruptcy continues to raise questions as to the security and value of this type of collateral, we think investors might become more skeptical of these bonds despite their relatively short maturities. We think the lower-coupon, longer-maturity UAL 6.75s could be the most at risk if sentiment turns more negative towards these bonds. We believe that A tranches at similar yields to the DAL 9.75s, UAL 9.875s, and CAL 6.75s offer better value. For higher yields, we think investors should swap into post-2009 B tranches or Air Canadas bonds, which we think have a better collateral package than other routes/slots bonds. The biggest risk to the upside for these deals is a favorable ruling in the AMR bankruptcy case that would affirm the secured creditors claim on these assets.
134
December 13, 2011
High Yield
Transportation: Shipping: Coverage view and recommendations

Justine Fisher Goldman, Sachs & Co. justine.fisher@gs.com 1-212-357-6711 Joshua Pinkerton Goldman, Sachs & Co. joshua.pinkerton@gs.com 1- 212-357-9774 We have a Cautious coverage view for shipping in 2012. We had a Cautious coverage view for the shipping sector in 2011, but the industrys operational and credit performance was far worse than even our negative expectations. The sector struggled with slow demand growth and a large supply overhang in 2011; this pushed rates to the single digits for prolonged periods across vessel types, driving substantial cash burn for spot-exposed operators. In our coverage space, General Maritime and several other smaller shipping companies filed for bankruptcy, Frontline (a major counterparty for Ship Finance) restructured its leases and capital structure, and shipping bonds across the board traded wider. While banks have continued to give waivers to numerous shipping companies on their covenant breaches, we have seen key European bank lenders take a somewhat tougher tone over the last couple of months as they face balance sheet issues of their own. In our view, this has pushed many more shipping companies (mostly smaller companies and large companies outside of our coverage universe) closer to having potentially acute liability management problems for 2012.
We expect weak rate conditions to persist through 2012

We expect many of the same trends that made 2011 a bad year for shipping to continue in 2012. Our economists are forecasting relatively tepid global growth (3.2%, down from 3.8% in 2011 and 5.1% in 2010). On top of this soft demand growth, supply growth should be substantial. The orderbooks for dry bulk, tanker, and container ships have expanded over the past few years, driven by new shipyards and orders placed at the top of the market. These new deliveries have outpaced demand growth and led to a sharp reduction in vessel values and rates. While very weak market conditions in 2011 led to some order cancellations, many orders have simply been delayed (owners do not want to sacrifice their deposits and shipyards still want the business). These delays have compounded the impact of an already-large orderbook for 2012, adding to the overhang of potential supply that further suppresses values. Overall, the weak rate environment of 2011 has not cleared the backlog of vessels. Rates have bounced around low levels for several quarters, and we do not expect much improvement in 2012. Exhibit 145: GSHY rate forecasts for 2012
VLCC Suezmax Aframax Products Capesize Panamax
2011Actual(YTD) $16,451 $18,519 $12,456 $12,249 $12,977 $11,440
2012Forecast $18,000 $17,000 $15,000 $13,000 $17,000 $15,000
135
December 13, 2011
High Yield
The container segment has the best chance of further supply rationalization, but we expect a weak year for all sub-sectors
While in previous years we have had a preference for one shipping sub-sector over another (for example, tankers over dry bulk) we do not have one for 2012, because overcapacity and weak economic conditions should plague the entire sector. We cannot point to any overall bullish signs for any of the three sub-sectors (tankers, dry bulk, and containers). If there is one sub-sector that we think has the best ability to rein in capacity thereby pushing through rate increases it is the highly-consolidated container sector. Container liners did this during the 2009 financial crisis and were able to generate significant rate increases and EBITDA growth in 2010 as a result. During the current rate downturn, we have seen large liner companies keep more capacity active in an effort to squeeze out smaller players in the market. Accordingly, we have not seen the rate increases that we think might be possible if liners idled the same level of capacity as they did during the financial crisis. Still, we think it is more possible here than in other sectors, hence our slightly higher optimism about the container industry. We emphasize, however, that this level of optimism is slight, as there is still a substantial order book of very large container vessels.
Vessel supply rationalization could slightly improve the outlook for 2013, but 2012 should be a year of more market pain
What will it take for rates to increase to healthier levels? Eventually we believe the difference between the supply and demand will be brought into balance by (1) working through the orderbook backlog, (2) the scrapping of older ships, and (3) an increase in demand. We think this is unlikely to occur in 2012, though we may start to see the fruits of these corrective trends in 2013. As far as backlog is concerned, one positive aspect of the weak market in 2011 is that it drove down new orders to a trickle on the tanker and dry bulk side (though large container liners continued to order new capacity). The orderbook for 2012 is a hangover from previous strong years, but as we show in several exhibits below, the order books for 2013 and 2014 are much smaller. We emphasize that we expect a retrenchment in the willingness of European banks to finance some new orders as well. We do not expect European financing for shipping to go to zero, and we also expect Asian banks and Asian Export-Import banks to finance deliveries. But, more difficult financing conditions should help keep new orders subdued in 2012. Scrapping has been another positive aspect of a weak market. While YTD tanker scrapping numbers from Clarksons are lower than 2010 scrapping, levels remain high compared with the peak rate years in the middle of the decade. Dry bulk has already seen a significant increase in scrapping, which should help offset some of the new deliveries in 2012. We expect scrapping of older tonnage in 2012 to be at least on par with 2011. This should help rationalize some vessel supply for 2013 and 2014.
136
December 13, 2011
High Yield
Exhibit 146: Dry bulk has seen a significant increase in scrap activity in 2011
DWT scrapped
12,000,000 10,000,000 8,000,000 6,000,000 4,000,000
Exhibit 147: Tanker scrapping rates have been below 2010 levels, but are much higher than mid-decade
DWT scrapped
12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000
2,000,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Capesize Panamax Handymax Handysize
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VLCC Suezmax Aframax Panamax Handysize
Source: Clarksons.
Source: Clarksons.
Demand is the obvious final swing factor. If economic conditions in the US and Europe
remain weak through 2013, we expect the tanker market and the container market to have a more difficult recovery. Choppy Chinese demand for commodities could negatively affect the dry bulk market as well (though our economists remain sanguine about Chinas ability to avoid a hard landing). Overall, better global economic conditions in 2013 could help absorb some higher supply, though we will only develop a firm view on this as 2012 progresses. We see few, if any, near term catalysts to help accelerate a rebalancing of the market in 2012, but another weak year in 2012 could set the stage for a slight improvement in 2013. Exhibit 148: The unfavorable environment has pushed most shipping bond yields to the mid-teens
GS TKR SFL OSG TK NM NM NNA ULTR Rating IL U U OP IL IL IL Size (MM) $449 $300 $450 $400 $350 $400 $180 Coupon (%) 8.500 8.125 8.500 8.875 8.125 8.625 9.000 Priority Sr Nts Sr Nts Sr Nts Sr. Sec. Nts Sr. Sec. Nts Sr. Sec. Nts 1st Mtg. Nts Maturity 15-Dec-13 31-Mar-18 15-Jan-20 01-Nov-17 15-Feb-19 01-Nov-17 24-Nov-14 Agency Ratings B3/B+ Caa1/B B2/BBBa3/BBB3/B+ B2/B B3/BNext Call Price 100.000 MW MW 104.44 104.44 104.310 101.500 01-Nov-13 01-Nov-13 01-Nov-13 12-Jan-12 Date 12-Jan-12 Bid Price 92.500 68.000 96.000 95.000 73.000 70.000 91.000 YTW (%) 13.759 16.470 9.200 10.013 14.250 16.850 12.750 STW (bp) 1351 1562 835 916 1340 1600 1241
Source: Company reports, Bloomberg, Goldman Sachs.
Dry bulk: Solid long term demand trends offset by large supply overhang
In general for 2012, dry bulk demand should benefit from a greater reliance on emerging markets than tankers or containers. The two largest drivers of dry bulk demand seaborne iron ore and coal should continue to do relatively well. China continues to import large quantities of raw materials for its domestic steel industry, and it continues to have a preference for higher-quality imported ore.
137
December 13, 2011
High Yield
We expect dry bulk demand to increase by roughly 5% in 2012 (a combination of midsingle digit iron ore and thermal coal demand growth and minor bulk demand growth in line with global GDP). We use a 1.7x multiplier on demand to arrive at vessel demand growth in order to account for fleet inefficiency and port congestion. On the supply side, the gross dry bulk orderbook for 2012 represents almost 19% of the total fleet, not including 31.7 million DWT (another 5.2% of the fleet) that has been delayed from 2011. The Capesize orderbook remains very large at 20% of the fleet for 2012. The Handymax order book is smaller but still significant at about 12%. We note that we time-adjust our 2012 orderbook forecasts for deliveries through the year not all vessels are delivered in January, so we use a weighted average of deliveries by month in order to more accurately account for the capacity effect of vessels delivered at the end of the year. Our adjustment also takes into account delays in the orderbook. This adjusted number is ultimately about 60% of the gross orderbook number. Exhibit 149: Larger bulkers have larger order books compared to the current fleet
Gross order book is total DWT on order; adjusted orderbook for 2012 (60% of gross) accounts for delays and a weighted average of deliveries through the year. 2011 represents delayed orders and orders scheduled to be delivered before the end of the year
Asof12/1/11 Current Fleet DWT 242.7 153.5 124.6 83.9 604.7 2011 Grossorderbook PF2011Fleet DWT % DWT 13.8 5.7% 256.5 6.9 4.5% 160.4 5.9 4.7% 130.5 5.1 6.1% 89.0 31.7 5.2% 636.4 2012 Grossorderbook Adjusted* DWT % DWT % 51.7 20.2% 31.0 12.1% 37.0 23.1% 22.2 13.8% 20.6 15.8% 12.4 9.5% 10.9 12.2% 6.5 7.3% 120.2 18.9% 72.1 11.3% 2013 Grossorderbook DWT % 21.8 7.1% 16.0 8.1% 9.2 6.1% 3.3 3.3% 50.3 6.6% 2014 Grossorderbook DWT % 5.3 1.6% 3.4 1.6% 1.5 0.9% 0.7 0.6% 10.8 1.3%
Capesize Panamax Handymax Handysize Allbulkers
*Adjustedorderbooktakesintoaccounttheweightedaverageofdeliveriesthroughtheyear(notallvesselswillarriveinJanuary) aswellasdelaysintheorderbook;adjustedorderbookisroughly60%ofthegrossorderbook
Source: Clarksons, Goldman Sachs Credit Research estimates.
These large order books will likely more than offset any positive trends in demand. We have seen an increase in the scrapping of older vessels, but not enough to close the gap created by the supply of new ships. Owners have been reluctant to remove ships from the fleet on a large scale as long as they can break even, and supply rationalization is difficult because the dry bulk market is fragmented. Even if we assume a level of scrapping on par with 2011, fleet growth should outpace demand in 2012. We highlight that we think our adjusted fleet growth forecast is quite conservative because, at 60% of the gross orderbook, it cuts scheduled deliveries almost in half. If deliveries proceed on time, the rate environment should feel more pressure.
138
December 13, 2011
High Yield
Exhibit 150: Dry bulk supply growth should outpace demand growth
Drybulk(seaborne)demandgrowth tonnemilemultiplier Drybulkvesseldemandgrowth Drybulksupplygrowth2011delays(DWT,millions) Drybulksupplygrowth2012adjusted(DWT,millions) lessscrapping(DWT,millions) Neteffective2012drybulksupplygrowth(DWT,millions) Neteffective2012drybulksupplygrowth

2012GSEst. 5.0% 1.7 8.5% 31.7 72.1 21 82.8 13.7%
In the meantime, vessel values have declined, and we expect them to remain under pressure. Exhibit 151: Capesize vessel values
$180mm $160mm $140mm $120mm $100mm $80mm $60mm $40mm $20mm $0mm 200001 200201 New 200401 200601 200801 201001
Exhibit 152: Panamax vessel values

$120mm $100mm $80mm $60mm $40mm $20mm $0mm 200001
200201 New
200401
200601
200801
201001
5yearold
10yearold
5yearold
10yearold
Source: Clarksons.
Source: Clarksons.
Exhibit 153: Handymax vessel values

$90mm $80mm $70mm $60mm $50mm $40mm $30mm $20mm $10mm $0mm 200001 200201 200401 New 200601 200801 201001
Exhibit 154: Handysize vessel values

$60mm $50mm $40mm $30mm $20mm $10mm $0mm 200001
200201 New
200401
200601
200801
201001
5yearold
5yearold
10yearold
Source: Clarksons.
Source: Clarksons.
139
December 13, 2011
High Yield
Tankers: Expect another tough year in 2012

The tanker names have been some of the most challenged in shipping. Tankers have suffered from soft global demand, an extremely fragmented fleet that makes cutting capacity difficult, an increase in North American oil production that has reduced the need for shipping capacity, and an inverted oil curve that has reduced demand for floating storage. The demand for tankers is more closely tied to stagnant developed markets than the demand for dry bulk, which depends more on growing emerging markets. Weakness in developed markets can have a double impact on tanker demand because it takes only half as long to transport oil from the Middle East to China as it does from the Middle East to the US, reducing the tanker capacity needed to transport the same amount of oil. Our energy team expects global oil demand to grow by about 1.5% next year. We use a 1.7x multiplier to translate oil demand into tanker demand, implying a 2.6% increase in tanker demand. Using a similar methodology for our calculation on dry bulk, we arrive at an adjusted tanker orderbook of 5.6% of the existing fleet for 2012. Because of the small orderbooks for smaller vessel types, we think this number masks the larger orderbooks for Suezmaxes (15.2% gross, 9.1% adjusted) and VLCCs (11.2% gross, 6.7% adjusted). Similar to dry bulk, the fragmented nature of the tanker industry makes it more difficult to voluntarily cut capacity, and so reductions may not occur until owners begin going out of business. Exhibit 155: Tanker orderbook is smaller than dry bulk, but still significant
Gross order book is total DWT on order; adjusted orderbook for 2012 (60% of gross) accounts for delays and a weighted average of deliveries through the year. 2011 represents delayed orders and orders scheduled to be delivered before the end of the year
Asof12/1/11 Current Fleet DWT 175.3 68.6 96.8 29.6 104.4 474.7 2011 PF2011Fleet Grossorderbook DWT % DWT 4.4 2.5% 179.7 0.6 0.9% 69.2 1.3 1.3% 98.1 0.3 1.0% 29.9 2.6 2.5% 107.0 3.6 0.8% 478.3 2012 Grossorderbook Adjusted* DWT % DWT % 20.2 11.2% 12.1 6.7% 10.5 15.2% 6.3 9.1% 6.2 6.3% 3.7 3.8% 1.6 5.4% 1.0 3.2% 5.9 5.5% 3.5 3.3% 44.4 9.3% 26.6 5.6% 2013 Grossorderbook DWT % 14.6 7.3% 6.3 7.9% 1.7 1.6% 1.6 5.1% 2.9 2.6% 27.1 5.2% 2014 Grossorderbook DWT % 3.5 1.6% 0.8 0.9% 0.8 0.8% 0.0 0.0% 0.3 0.3% 5.4 1.0%
VLCC Suezmax Aframax Panamax Productandother Alltankers
*Adjustedorderbooktakesintoaccounttheweightedaverageofdeliveriesthroughtheyear(notallvesselswillarriveinJanuary) aswellasdelaysintheorderbook;adjustedorderbookisroughly60%ofthegrossorderbook
Assuming, as we do for dry bulk, that scrapping in 2012 remains on par with 2011 numbers, fleet growth should outpace demand growth again.
140
December 13, 2011
High Yield
Exhibit 156: Expect net tanker supply to outpace demand growth
Oildemandgrowth tonnemilemultiplier TankerDemandGrowth Tankersupplygrowth2011delays(DWT,millions) Tankersupplygrowth2012adjusted(DWT,millions) lessscrapping(DWT,millions) Neteffective2012tankersupplygrowth(DWT,millions) Neteffective2012tankersupplygrowth

2012GSEst. 1.5% 1.7 2.6% 3.6 26.6 10 20.2 4.3%
Similar to dry bulk values, tanker values have been pressured as a result of low rates, and we expect values to remain under pressure in 2012. Exhibit 157: VLCC vessel values Exhibit 158: Suezmax vessel values
$140mm $120mm $100mm $80mm $60mm $40mm $20mm $0mm 200001
200201
200401
200601
200801
201001 New
5yearold
10yearold
Source: Clarksons.
Source: Clarksons.
Exhibit 159: Aframax vessel values

$100mm $90mm $80mm $70mm $60mm $50mm $40mm $30mm $20mm $10mm $0mm 200001 200201 New 200401 200601 200801 201001
5yearold
10yearold
Source: Clarksons.
141
December 13, 2011
High Yield
Container ships: Tough environment but best hope for capacity rationalization
Container ship demand is largely driven by GDP growth and imports in the large developed markets, particularly the US and Europe. Our economists are expecting advanced economy import growth to slow to 1.9% in 2012 from 5.0% in 2011 and 11.6% in 2010. We are already seeing the impact of a weaker Europe on Asia-Europe container routes, where rates have dropped sharply in the last few months. Similar to tankers and dry bulk; however, a large orderbook should continue to weigh on rates. Exhibit 160: Growth in containerships is concentrated in the biggest ships
Order book growth, including gross order book and approximate time adjusted (60% of gross). 2011 represents delayed orders and orders scheduled to be delivered before the end of the year.
>8000TEU 30007999TEU <3000TEU Allcontainers
2011 Gross 6.0% 2.6% 3.4% 3.8%
Gross 38.0% 9.7% 5.4% 17.8%
2012 Adjusted 22.8% 5.8% 3.2% 10.7%
2013 Gross 28.6% 14.4% 5.8% 18.2%
2014 Gross 16.8% 2.0% 0.4% 7.7%
The container shipping industry has had more success restricting supply in the past because (1) the container shipping industry operates on fixed schedules rather than point to point cargoes, which creates a more concentrated industry, (2) coordinated alliances control a relatively large share of the market, and (3) the largest container ship operators lease in a lot of their fleet, giving them the ability to cut capacity and costs relatively easily. We have seen the container shipping companies take some actions to bring the market into balance, for example CMA CGM has cut capacity on its Asia-Europe routes and formed and alliance with Mediterranean Shipping Co that will control approximately 23% of the global container fleet. However, these moves have not been enough to offset declining demand (especially from Europe) and increased supply brought on by new, very large container ships, and rates have remained stagnant. The 2012 order book for ships greater than 8,000 TEU represents 38% of the existing fleet, the largest of any of the shipping markets we follow. This will likely have a knock-on effect in the market for smaller ships as larger ships cascade down to smaller capacity markets.
Top Pick: Navios Maritime Holdings Secured and insured

GS TKR Rating Size (MM) Coupon (%) Priority Maturity Agency Ratings Next Call Price Date Bid Price YTW (%) ZSPRD (bp)
NM
OP
$400
8.875
Sr Secured
11/1/2017
BB-/Ba3
104.440
01-Nov-13
92.000
10.740
990
142
December 13, 2011
High Yield
We like secured bonds with insured time charters for 2012

While the Navios Maritime Holdings 8.875s are some of the tightest-trading bonds in the shipping sector, they are the only bonds we recommend for 2012 because they are secured by a pool of vessels, and the time charters on those vessels are insured. Also, they still yield 10.74% which, while tight for shipping, is wide compared with the broader High Yield market. We think this makes them attractive versus most other shipping bonds, which are unsecured. We also expect solid time charter coverage for Navios Maritime Holdings to keep cash flows stable in 2012. We now calculate an LTV for these bonds of above 100%, but we think this is still attractive compared with unsecured shipping bonds. Exhibit 162: LTV is above 100%, but the NM 8.875s have the best secured asset coverage of shipping bonds
Name
Type
Age
12 11 11 11 10 10 9 9 9 5 3 3 12 3 2
Prospectus CharterValue
$21.3 $37.5 $23.0 $40.5 $34.8 $55.5 $24.8 $26.0 $40.0 $54.5 $34.0 $35.5 $28.3 $110.0 $102.3 60%
Prospectus CharterfreeValue
$23.3 $24.5 $24.5 $24.5 $25.8 $25.8 $27.3 $27.3 $27.3 $32.0 $35.5 $35.5 $28.3 $71.5 $71.5 79%
GSEst.at 12/12/2011
$17.0 $18.0 $18.0 $18.0 $19.0 $19.0 $21.0 $21.0 $21.0 $25.0 $29.0 $29.0 $18.0 $44.0 $46.0 110%
Ionian Ultra Handymax Horizon Ultra Handymax Herakles Ultra Handymax Achilles Ultra Handymax Meridian Ultra Handymax Mercator Ultra Handymax Arc Ultra Handymax Hios Ultra Handymax Kypros Ultra Handymax Ulysses Ultra Handymax Vega Ultra Handymax Celestial* Ultra Handymax Magellan Panamax Lumen Capesize Phoenix Capesize LTV ON $400 MILLION
Key risks to out view

Key risks to our view are lower dry bulks rates and vessel values, or additional leveraged acquisitions by Navios Maritime Holdings.

Navios Maritime reported 3Q2011 EBITDA of $60 million. Total liquidity was $264.1 million, down from $412 million at 2Q2011, primarily because of spending related to Navios Logistics. In October, Navios agreed to acquire an 82,000 DWT bulk carrier for $35.3 million. The ship will be chartered out at a rate of $12,825 for two years a rate that was lower than what we had expected. We expect that the difficult shipping market will continue to impact Navios as its current charters expire and it releases ships at lower rates.
Company description
Navios is a global dry bulk shipping company headquartered in Greece.
143
December 13, 2011
High Yield
Exhibit 163: Navios Maritime Holdings Financial model

Navios Maritime Holdings, Inc.
FINANCIAL SUMMARY US$ (millions) OPERATING STATISTICS Average Panamax TCE Average Ultra-Handymax TCE Average Capesize TCE INCOME STATEMENT Net Sales Vessel Operating Expenses & Time Charter Expense Gross Profit Gross Margin Selling General & Admin EBITDA EBITDA Margin Depreciation and Amortization Operating Income Other Income, net Interest Expense Pretax Income Income Taxes Minority Interest & Equity In Subsidiaries Net Income CASH FLOW EBITDA EBITDA Margin Operating Cash Flow Before Working Capital Change in Working Capital Capital Expenditures Acquisitions & Newbuilds Asset Sales Equity Issuance Debt Issuance Debt Redemptions (including net revolver payments) Dividends, Distributions, and Share Repurchases Other CHANGE IN CASH 238 35.0% 243 0 (17) (665) 484 34 867 (804) (27) (20) 94 76 41.7% 55 0 (3) (59) 0 0 377 (318) (8) (72) (27) 57 34.6% 18 0 (29) (2) 120 0 212 (148) (7) (3) 162 61 35.2% (15) 0 (35) (26) 0 0 16 (73) (7) (8) (147) 52 31.7% 29 28 (6) (15) 0 0 0 (18) (6) 0 12 246 35.9% 727 28 (73) (101) 120 0 605 (557) (27) (82) 639 45 28.0% 23 (0) (6) (22) 0 0 18 (19) (6) 0 (13) 46 29.0% 24 1 (6) (22) 0 0 18 (18) (6) 0 (10) 50 28.4% 27 (5) (6) 0 0 0 0 (15) (6) 0 (5) 50 28.6% 27 1 (6) 0 0 0 0 (15) (6) 0 0 191 28.5% 101 (3) (25) (44) 0 0 35 (67) (24) 0 (27) 227 31.0% 140 (8) (25) 0 0 0 0 (61) (24) 0 22 271 38.1% 116 0 (74) (181) 282 34 1,094 (1,131) (28) (50) 62 680 (384) 296 43.6% (59) 238 35.0% (102) 136 72 (102) 105 (0) 41 146 182 (93) 89 48.8% (13) 76 41.7% (33) 43 (58) (29) (45) 1 6 (38) 165 (94) 71 43.0% (14) 57 34.6% (24) 33 37 (25) 44 (1) 8 51 174 (100) 74 42.3% (12) 61 35.2% (25) 37 (5) (24) 8 0 8 16 164 (99) 65 39.6% (13) 52 31.7% (22) 30 1 (24) 7 0 0 7 685 (387) 298 43.6% (52) 246 35.9% (105) 141 (25) (103) 14 0 22 36 163 (104) 58 36.0% (13) 45 28.0% (22) 23 1 (24) 1 0 0 1 160 (101) 59 37.1% (13) 46 29.0% (22) 24 1 (23) 2 0 0 2 175 (112) 63 35.8% (13) 50 28.4% (22) 27 1 (23) 5 0 0 5 173 (111) 63 36.1% (13) 50 28.6% (22) 27 1 (23) 5 0 0 5 671 (428) 243 36.2% (52) 191 28.5% (89) 102 4 (94) 12 0 0 12 733 (454) 279 38.1% (52) 227 31.0% (87) 140 4 (91) 53 0 0 53 711 (386) 325 45.7% (54) 271 38.1% (113) 158 8 (116) 50 (1) 33 82 $22,434 $20,728 $30,032 $22,434 $20,536 $26,699 $20,434 $16,829 $30,493 $19,267 $16,966 $26,299 $21,143 $18,765 $28,381 $19,267 $16,674 $26,961 $17,534 $16,660 $27,548 $17,534 $16,729 $27,548 $17,534 $16,652 $27,548 $17,968 $16,679 $27,401 $19,451 $17,021 $27,937 12/31/10 1QA Ended 03/31/11 2QA Ended 06/30/11 3QA Ended 09/30/11 4QE Ended 12/31/11 FY Ended 12/31/11 1QE Ended 03/31/12 2QE Ended 06/30/12 3QE Ended 09/30/12 4QE Ended 12/31/12 Projected FY Ended 12/31/12 12/31/13 LTM 09/30/11
Exhibit 164: Navios Maritime Holdings Financial model

Navios Maritime Holdings, Inc.
FINANCIAL SUMMARY US$ (millions) COVERAGE & LEVERAGE EBITDA / Total Interest Debt / EBITDA SUMMARY BALANCE SHEET Cash and Marketable Securities Receivables Inventory Other Current Assets Current Assets Net Plant and Equipment Goodwill Deferred taxes & Other Assets Total Assets Short-Term and Current Debt Payables Accrued Expenses Other Current Liabilities Current Liabilities Senior Secured Debt Senior Debt Senior Subordinated Debt Junior and Convertible Debt Non-Recourse Debt Long-Term Debt Other Long Term Liabilities Preferred Stock at Liquidation Value Total Equity less Preferred Stock Total Liabilities & Equity 242 70 0 37 350 2,627 175 525 3,677 63 49 62 26 202 1,725 318 0 0 0 2,044 372 0 1,060 3,677 199 72 0 46 317 1,836 160 557 2,870 65 42 70 29 205 807 595 0 0 0 1,402 242 0 1,021 2,870 361 94 0 65 521 1,768 160 541 2,991 75 45 77 30 227 867 595 0 0 0 1,462 247 0 1,056 2,991 212 108 0 90 410 1,783 160 570 2,924 102 55 87 34 277 945 432 0 0 0 1,378 224 0 1,045 2,924 224 20 0 90 334 1,782 160 637 2,914 67 62 87 34 250 824 570 0 0 0 1,394 224 0 1,046 2,914 224 20 0 90 334 1,782 160 637 2,914 67 62 87 34 250 824 570 0 0 0 1,394 224 0 1,046 2,914 211 20 0 90 321 1,788 160 620 2,890 73 63 87 34 256 799 570 0 0 0 1,369 224 0 1,040 2,890 202 20 0 90 311 1,794 160 618 2,884 69 62 87 34 251 802 570 0 0 0 1,372 224 0 1,036 2,884 197 20 0 90 306 1,778 160 646 2,890 65 67 87 34 253 809 570 0 0 0 1,379 224 0 1,035 2,890 197 20 0 90 307 1,762 160 644 2,873 61 66 87 34 247 798 570 0 0 0 1,368 224 0 1,033 2,873 197 20 0 90 307 1,762 160 644 2,873 61 66 87 34 247 798 570 0 0 0 1,368 224 0 1,033 2,873 220 20 0 90 329 1,700 160 660 2,850 54 74 87 34 249 744 570 0 0 0 1,314 224 0 1,062 2,850 212 108 0 90 410 1,783 160 570 2,924 102 55 87 34 277 945 432 0 0 0 1,378 224 0 1,045 2,924 2.3 8.9 2.6 4.8 2.3 6.7 2.5 6.0 2.2 7.0 2.4 5.9 1.9 7.9 2.0 7.8 2.1 7.3 2.1 7.2 2.0 7.5 2.5 6.0 2.3 5.5 12/31/10 1QA Ended 03/31/11 2QA Ended 06/30/11 3QA Ended 09/30/11 4QE Ended 12/31/11 FY Ended 12/31/11 1QE Ended 03/31/12 2QE Ended 06/30/12 3QE Ended 09/30/12 4QE Ended 12/31/12 Projected FY Ended 12/31/12 12/31/13 LTM 09/30/11
144
December 13, 2011
High Yield
Top Pan: Overseas Shipholding Group Large fleet of spotexposed tankers should weigh on 2012
Exhibit 165: OSGs benchmark security
GS TKR OSG Rating U Size (MM) $300 Coupon (%) 8.125 Priority Sr Nts Maturity 31-Mar-18 Agency Ratings Caa1/B MW Next Call Price Date Bid Price 68.000 YTW (%) 16.470 STW (bp) 1562
Leverage should remain very high for 2012

We expect the difficult tanker market will cause OSG to generate negative free cash flow in 2012. Leverage should be over 17.0x. We believe OSG could face liquidity concerns if it is not able to (1) obtain approval and funding for the $425 million of Title XI financing it is seeking, (2) exercise the accordion feature on its revolver, or (3) raise additional capital. We are also concerned about the rise of covenant concerns (maximum leverage, minimum tangible net worth, and minimum unencumbered assets) if OSG ultimately has to write down the book value of its assets at the end of this year owing to weak vessel values and shorter useful lives. Our forecasts include a slight improvement in tanker rates in 2013 as supply is rationalized globally. However, our forecast for liquidity remains tight, as OSG has $30 million of capex to fund in 2013, around $40 million of drydock expense according to our estimates, and it has $63 million of 8.75% senior notes maturing that year. Our model assumes that OSG will be able to issue debt to refinance these bonds, though we do not specify the source of this debt (we expect it would be revolver drawings or a new deal of some sort). We think this highlights how critical it is that OSG obtain Title XI financing in order to repay revolver drawings.

Key risks to our view are the closing and funding of OSGs anticipated Title XI financing, as well as higher tanker rates.
Recent developments include a downgrade to Caa1 by Moodys

OSG generated -$1 million of EBITDA in 3Q11 and saw its liquidity decline to about $900 million. We expect it to have EBTDA of $122 million in 2012, giving it leverage of 17x, and to end 2012 with cash of $54 million. OSG was downgraded by Moodys to Caa1 in December, putting the companys bond rating at Caa1/B. This is a stark change for a company that only a couple of years ago was considered a solid double-B credit. OSG maintains substantial operating leverage to a stronger tanker market, but we do not expect the market to strengthen significantly in 2012, which should keep leverage high and cash flows under pressure.
Company description
Overseas Shipholding Group owns and operates crude and product tankers.
145
December 13, 2011
High Yield
Exhibit 166: OSG Financial model

Overseas Shipholding Group, Inc.
FINANCIAL SUMMARY US$ (millions) OPERATING STATISTICS VLCC Spot Suezmax Spot Aframax Spot Crude Panamax Spot Panamax Product Carriers Spot Handysize Product Carriers Spot INCOME STATEMENT Net Sales Vessel Operating Expenses & Time Charter Expense Gross Profit Income from Vessels in Joint Ventures Selling General & Admin EBITDA (includes joint venture vessels) EBITDA Margin Depreciation and Amortization Operating Income Other Income, net Net Interest Expense Pretax Income Income Taxes Minority Interest Net Income CASH FLOW EBITDA (includes joint venture vessels) EBITDA Margin Operating Cash Flow (Included Working Capital and Drydocking) Capital Expenditures Acquisitions & Newbuilds Asset Sales Equity Issuance Debt Issuance Debt Redemptions Dividends, Distributions, and Share Repurchases Other CHANGE IN CASH 122 14.2% 218 (3) (421) 15 159 643 (510) (54) (23) 25 23 11.1% 10 (0) (64) 9 0 85 (10) (14) (12) 4 21 10.2% (4) (4) (45) 4 0 20 (11) (13) (1) (53) (1) -0.6% (31) (2) (54) 0 0 66 (24) (13) 10 (48) 853 (635) 218 4 (100) 122 14.2% (171) (49) (26) (67) (142) 7 0 (134) 207 (165) 42 6 (24) 23 11.1% (42) (19) 1 (18) (36) 2 0 (35) 207 (168) 40 4 (22) 21 10.2% (43) (22) 2 (19) (39) 1 0 (37) 186 (171) 15 4 (20) (1) -0.6% (47) (49) (2) (21) (71) 0 0 (71) 188 (168) 20 8 (24) 4 1.9% (49) (46) 0 (24) (70) 0 0 (70) (9.7) 4 1.9% (15) (2) (43) 0 0 43 (11) (7) 0 (35) 46 5.9% (86) (8) (206) 13 1 214 (55) (48) (3) (179) 23 11.6% (8) (2) (6) 0 0 5 (15) (7) 0 (33) 25 12.4% (9) (2) (6) 0 0 5 (15) (7) 0 (34) 35 16.5% (5) (2) (6) 0 0 5 (14) (7) 0 (29) 38 17.8% 40 (2) (6) 0 0 5 (13) (7) 0 17 121 14.7% 17 (8) (24) 0 0 19 (57) (27) 0 (79) 163 18.4% 35 (8) (30) 0 0 92 (116) (27) 0 (53) 42 5.4% (81) (6) (344) 22 1 302 (55) (55) 29 (194) 788 (671) 116 21 (91) 46 5.9% (182) (135) 1 (82) (216) 3 0 (213) 196 (156) 40 5 (22) 23 11.6% (49) (27) 0 (25) (52) 0 0 (52) 200 (158) 42 5 (22) 25 12.4% (49) (24) 0 (25) (49) 0 0 (49) 212 (160) 52 5 (22) 35 16.5% (48) (13) 0 (25) (38) 0 0 (38) 215 (160) 55 5 (22) 38 17.8% (48) (9) 0 (25) (34) 0 0 (34) 823 (634) 189 20 (88) 121 14.7% (194) (73) 0 (100) (173) 0 0 (173) 882 (651) 231 20 (88) 163 18.4% (185) (22) 0 (106) (128) 0 0 (128) 783 (672) 111 22 (91) 42 5.4% (176) (111) 4 (76) (183) 7 0 (176) $35,848 $26,563 $16,340 $18,753 $17,445 $13,012 $24,131 $16,065 $14,746 $20,720 $19,279 $12,864 $20,400 $13,630 $10,390 $17,905 $15,124 $15,153 $10,993 $15,123 $10,322 $12,005 $11,205 $13,171 $11,220 $13,980 $11,050 $13,500 $13,800 $13,835 $16,686 $14,700 $11,627 $16,033 $14,852 $13,756 $15,000 $14,000 $13,000 $13,500 $13,500 $13,500 $15,000 $16,000 $14,000 $13,500 $13,500 $13,500 $20,000 $18,000 $16,000 $13,500 $13,500 $13,500 $22,000 $18,000 $17,000 $13,500 $13,500 $13,500 $18,000 $16,500 $15,000 $13,500 $13,500 $13,500 $23,000 $19,000 $17,000 $15,000 $15,000 $13,500 12/31/10 1QA Ended 03/31/11 2QA Ended 06/30/11 3QA Ended 09/30/11 4QE Ended 12/31/11 FY Ended 12/31/11 1QE Ended 03/31/12 2QE Ended 06/30/12 3QE Ended 09/30/12 4QE Ended 12/31/12 Projected FY Ended 12/31/12 12/31/13 LTM 09/30/11
Exhibit 167: OSG Financial model

Overseas Shipholding Group, Inc.
FINANCIAL SUMMARY US$ (millions) COVERAGE & LEVERAGE EBITDA / Total Interest Debt / EBITDA SUMMARY BALANCE SHEET Cash and Marketable Securities Receivables Inventory Other Current Assets Current Assets Net Plant and Equipment Deferred taxes & Other Assets Total Assets Short-Term and Current Debt Payables Accrued Expenses Other Current Liabilities Current Liabilities Senior Secured Debt Senior Debt Senior Subordinated Debt Junior and Convertible Debt Non-Recourse Debt Long-Term Debt Other Long Term Liabilities Preferred Stock at Liquidation Value Total Equity less Preferred Stock Total Liabilities & Equity 274 161 46 115 595 3,246 391 4,241 45 0 129 0 174 619 1,322 0 0 0 1,942 316 0 1,810 4,241 278 171 75 60 583 3,262 413 4,267 51 0 127 0 178 665 1,346 0 0 0 2,011 305 0 1,773 4,267 230 169 72 62 533 3,227 459 4,228 52 0 146 0 198 653 1,380 0 0 0 2,034 296 0 1,701 4,228 182 173 57 57 469 3,299 378 4,155 55 0 137 0 192 653 1,418 0 0 0 2,071 288 0 1,604 4,155 147 137 71 57 413 3,294 1,240 4,956 57 0 137 0 194 652 1,450 0 0 0 2,101 288 20 2,352 4,956 147 137 71 57 413 3,294 1,240 4,956 57 0 137 0 194 652 1,450 0 0 0 2,101 288 20 2,352 4,956 114 134 75 57 381 3,252 1,245 4,887 55 0 137 0 192 639 1,455 0 0 0 2,093 288 20 2,294 4,887 81 136 77 57 351 3,211 1,250 4,822 53 0 137 0 191 626 1,459 0 0 0 2,085 288 20 2,238 4,822 51 143 81 57 332 3,171 1,255 4,768 52 0 137 0 189 613 1,464 0 0 0 2,077 288 20 2,193 4,768 69 145 47 57 317 3,132 1,260 4,719 116 0 137 0 253 600 1,406 0 0 0 2,005 288 20 2,153 4,719 69 145 47 57 317 3,132 1,260 4,719 116 0 137 0 253 600 1,406 0 0 0 2,005 288 20 2,153 4,719 15 145 48 57 266 2,985 1,253 4,513 52 0 137 0 189 548 1,471 0 0 0 2,018 288 20 1,998 4,513 182 173 57 57 469 3,299 378 4,155 55 0 137 0 192 653 1,418 0 0 0 2,071 288 0 1,604 4,155 1.8 16.3 1.3 22.4 1.1 24.7 N/A (447.8) 0.1 152.6 0.6 46.4 0.9 23.6 1.0 21.5 1.4 15.3 1.5 13.8 1.2 17.6 1.5 12.7 0.6 50.2 12/31/10 1QA Ended 03/31/11 2QA Ended 06/30/11 3QA Ended 09/30/11 4QE Ended 12/31/11 FY Ended 12/31/11 1QE Ended 03/31/12 2QE Ended 06/30/12 3QE Ended 09/30/12 4QE Ended 12/31/12 Projected FY Ended 12/31/12 12/31/13 LTM 09/30/11
146
December 13, 2011
High Yield
Utilities and Power: Coverage view and recommendations

Raymond M. Leung Goldman, Sachs & Co. (212) 357-5764 raymond.m.leung@gs.com Abayomi A. Adigun, Ph.D. Goldman, Sachs & Co. (212) 902-9355 abayomi.adigun@gs.com We have a Neutral coverage view on the high yield utility and power sector as the sector trades among the widest within the High Yield market, particularly the merchant power names. As a result, we think that current spreads reflect the challenging underlying fundamental landscape for the merchant power sector and may be range bound relative to the broader market, in our view. In addition, the sector benefits from its underlying asset value and the reasonable near-term liquidity and hedge profile that lends credit support. Fundamentally, the sector faces a low power price environment owing to depressed gas prices, high generation reserve margins with the exception of the ERCOT market, and moderate demand growth. These challenges may continue to pressure margins over the near term. Also, the implementations and enactment of additional environmental requirements will remain an overhang for the industry. Ultimately, we believe that the implementation of environmental regulations and low gas prices will accelerate coal-plant shutdowns that will help tighten supply and demand characteristics and improve capacity markets, but this may be a longer-term trend. We believe the current landscape should benefit gas-fired generation and scrubbed coal as well as nuclear generation; with noncompliant unscrubbed coal-plants facing the greatest challenges.
We see environmental compliance as an industry near-term focal point for the next several years. Promulgated and future environmental rules around Cross State Air
Pollution Rule (CSAPR) and Hazardous Air Pollutants (HAPs) will be center stage as final rules related to HAPs/MACT are expected around December 16 for compliance beginning in 2015. These rules are likely to create uncertainty for the sector as the potential for litigation will remain and may be delayed given the tight compliance timeline, particularly for CSAPR. Thus, the timeline of implementation along with the impending rules will be critical and its impact on capital spending. Other future rules related to 316(b), cooling water regulation, and Coal Combustion Residuals could be finalized by mid-2012 with implementation in 2018 and 2020, respectively. Longer term, the implementation of new environmental rules should influence the power markets and will likely result in the shuttering of older lessefficient coal plants that should result in higher power and capacity prices. Our equity research team is expecting about 51GW of coal plant retirement driven by the upcoming MACT rules in the coming years.
Low gas prices are expected for the foreseeable future; this, along with the continued development of shale gas, will likely result in a lackluster, if not depressed, wholesale power price environment. Recently, the Goldman Sachs commodities research team
lowered its gas price deck for 2012/2013 to $3.70/$4.25 per mmbtu from $4.25/$5.00 per mmbtu. Their forecast is now more consistent with current market prices, with 2012/2013 gas swaps of $3.65/$4.26 per mmbtu as of December 7. With natural gas as the marginal fuel in many regions, the current low gas price environment is likely to limit upside improvement to wholesale power prices, resulting in continued margin pressure. This, coupled with coal prices remaining steady, should result in dark spread compression as favorable power/gas hedges roll off. One positive note is that power heat rates have improved and may continue to signal for higher capacity prices. The next key capacity auction will be PJMs 2015/2016 planning year capacity auction held in May 2012. We think higher capacity revenues should help the industry with GenOn Energy Inc. likely to see the greatest benefit in 2013.
147
December 13, 2011
High Yield
Exhibit 168: Gas prices remain low in the near term before improving
Forward natural gas swaps
$6.00 $5.50 $5.00
$/mmBTU
Exhibit 169: Heat rates have improved, helping to temper lower gas prices.
Around the clock power prices and heat rates
Regional Power Hub
Power price is $/mwh
January 7, 2011 2011 2012 2013 36.30 7.96 36.93 8.10 33.30 7.18 30.55 6.58 45.86 8.60 50.82 9.53 39.10 7.77 39.79 7.91 34.59 6.86 31.90 6.33 46.05 8.14 51.31 9.07 41.05 7.80 41.67 7.92 37.20 7.07 34.33 6.53 47.71 8.23 53.76 9.27
November 25, 2011 2012 2013 2014 36.68 9.50 35.93 9.31 33.18 8.38 31.76 8.02 42.59 9.66 48.32 10.96 39.26 8.90 37.81 8.57 34.72 7.75 32.93 7.35 43.99 9.01 49.99 10.24 40.22 8.56 38.65 8.22 37.33 7.84 34.34 7.21 46.17 8.98 NA NA
ERCOT North ERCOT South
Power Price Heat Rate Power Price Heat Rate
$4.50 $4.00 $3.50 $3.00 2011 2012

7-Jan-11
MISO CIN HUB Power Price Heat Rate PJM NIHUB Power Price Heat Rate PJM West Hub Power Price Heat Rate PJM East Hub Power Price Heat Rate
2013
25-Nov-11
2014
Source: Bloomberg and Goldman Sachs Credit Research.
In most regions, electric reserve margins are expected to remain high for the foreseeable future with peak demand growth of 1.5% over the next five years. However, the Electric Reliability Council of Texas (ERCOT) exhibits the most favorable power market characteristics related to the supply and demand outlook. Most recently, ERCOT this month indicated that it expects the regions reserve margin to dip below the targeted 13.75% in 2012 at 12% and decline to about 4% in 2017. Conversely, the western market has the highest reserve margin driven by anticipated additions that are attributable to renewable portfolio development based on the recent North American Electric Reliability Corporation November 2011 Long-Term Reliability Assessment report. Exhibit 170: Reserve margins remain high but Texas is expected to be well below its targeted reserve margin
Regional electric reserve margins
Regional Electric Reserve Margins 2011 ERCOT MISO NPCC-NE NPCC-NY PJM WECC-CALN WECC-CALS TOTAL U.S. 19.9% 22.1% 18.9% 32.3% 29.8% 30.1% 47.3% 27.1% 2012 12.1% 23.1% 16.9% 33.1% 23.8% 38.3% 56.0% 27.1% 2013 12.1% 20.7% 17.0% 37.0% 23.2% 42.7% 62.4% 26.7% 2014 7.6% 20.3% 18.7% 36.3% 21.6% 44.2% 63.5% 25.7% 2015 3.5%
($/MWday)
Exhibit 171: Eastern MAAC and MAAC sees higher capacity revenues; RTO to dip in 2012 before improving
PJM capacity auction results for planning year
300 250 200 150 100 50 0 2008/2009 2009/2010 2010/2011 2011/2102 (PlanningYear) EMAAC MAAC 2012/2013 RTO 2013/2014 2014/2015
19.4% 11.9% 39.0% 20.7% 44.6% 63.2% 24.2%
Source: North America Electric Reliability Corp., Energy Information Administration, Electric Reliability Council of Texas, and Goldman Sachs Credit Research.
Source: PJM Interconnection LLC and Goldman Sachs Credit Research .
Electric demand is expected to be lackluster despite the rebound of industrial demand to approximately 90%-95% of pre-recession levels. Power demand typically is
correlated to GDP growth, which the Goldman Sachs economics research team is expecting to be 1.5% for 2012. As a result, electric demand may rise at about 0.9% based on the typical correlation of 0.6% change in demand for every 1% of GDP growth. However, our equity research colleagues, utilizing a bottom up approach, are expecting a lower normalized demand growth of 0.3% in 2012 before improving to about 1.1% for 2013 and
148
December 13, 2011
High Yield
2014. Based on Energy Information Administration (EIA) information, actual sales growth is expected to decline 0.8% y-o-y in 2012 as 2011 benefitted from favorable weather.
The good news is that the sector has a fairly manageable debt maturity profile with no major debt maturities and adequate liquidity. In the year ahead, the sector has
limited near-term financing needs absent opportunistic financing for liability management such as debt exchanges or retirement. In addition, capital spending over the near term is expected to be largely internally funded, but future environmental regulations remain an overhang and may necessitate additional spending requirements.
Event risk may be limited as we think that industry consolidation will be fairly muted in the power space. But, we believe that the sector will continue to rationalize core and
non-core assets. Generation transaction values for fossil plants have improved modestly with an average price of $472 per kW in 2011 compared to $438 per kW in 2010. Still, this remains well below the average prices realized in 2008 and 2009 of $843 per kW and $655 per kW, respectively. In terms of valuation, the power sector has been a bifurcated market with relatively high quality credit names at one end of the spectrum and highly levered beta names on the other end of the spectrum. As a whole, the sector trades significantly wider than the iBoxx HY Index, supporting our Neutral coverage view, and we believe spreads will move consistent with the market. In addition, we prefer cash bonds given the underlying asset base that should support current trading levels over CDS. Exhibit 172: Sector trades wide relative to the index
Sector cash bond spreads versus iBoxx
1,300 1,200 1,100 1,000
Exhibit 173: CDS has seen greater volatility

IPP CDS versus HY CDX
2,000 1,800 1,600 1,400
Spread (bp)
Spread (bp)
1,200 1,000 800 600 400 200
900 800 700 600 500 400 Nov-10 Feb-11

iBoxx HY 5-10YR
May-11
GS IPP Index ex CCC
Aug-11
GS IPP Index
Nov-11
0 Nov-10
Feb-11
HY CDX 5YR
May-11
Aug-11
CDX HY BB GS IPP 5YR CDS
Nov-11
HY CDX 5YR CDS - IPP Constituents
We believe the sectors liquidity profile will remain solid given the absence of any major debt maturities and a manageable near-term spending outlook. Therefore, the need for external debt financing in 2012 should be limited absent opportunistic financing or potential debt exchanges. This could lend to a positive technical for the sector given the lack of issuance. Edison Mission Energy (IL) faces the nearest-term challenge with its bank lines maturing in 2012, and NRG Energy Inc. (NRG; IL) has indicated plans to refinance its remaining restrictive covenant bonds ($1.1 billion of 7.375% due 2017 notes) that are callable in January 2012. This may offset the lack of near-term catalysts given the challenging fundamental outlook.
149
December 13, 2011
High Yield
GenOn Energy: Solid liquidity and financials improve longer term

Exhibit 174: GenOn benchmark security and CDS
Size (MM) 675 GS Rating OP Coupon (%) 9.500 Priority Sr Unsec'd Maturity 15-Oct-18 Agency Ratings B3/B Next Call Price Date Bid Price $102.50 YTW (%) 8.99 STW (bp) 698 5 year CDS 11/12.5

GenOn Energy Inc. (GEN) remains our top pick as we believe it provides the best riskadjusted return in the sector given its solid underlying liquidity profile, which should help fund its near-term spending program. The lower 2012 EBITDA outlook will continue to be a near-term headwind along with future environmental regulations. However, we think GEN trades too wide and the expected EBITDA uplift in 2013 owing to expected increases in capacity revenues should limit downside spread movement and provide a catalyst for spread improvement. Furthermore, management has been well-balanced in maintaining the companys solid liquidity profile given its large cash balance and has been proactive in adding hedges to reduce cash flow volatility. At the end of 3Q, the company had $2.3 billion of available liquidity that included about $1.7 billion of cash on hand. From a relative value standpoint, we think GEN should gravitate to about 25-50 bp behind NRG Energy Inc. 7.625% of 2018 notes, which would imply 50-75 bp of upside. From a CDS standpoint, we like selling three-year GEN protection (2.25/4.25 points up front) given its strong liquidity profile.

Key risks to our view include a protracted and lower-than-expected wholesale power/capacity outlook. Also, a shift to a more aggressive financial policy and future environmental expenditures might limit financial improvement.

We expect 2012 to be somewhat challenging for GenOn, but we envision EBITDA improving in 2013 owing to higher capacity revenues with adjusted net debt-to-EBITDA declining to 4.25x in 2013 from a peak of nearly 7x in 2012. As a result, we think the improved EBITDA outlook could prove a catalyst for spread tightening along with similar PJM capacity auction results expected in May 2012. In terms of recent developments, GEN reported adjusted EBITDA of $256 million for 3Q2011, which was lower than the pro forma $415 million in 3Q2010. The y-o-y decline resulted from lower adjusted energy gross margin primarily because of lower generation volumes and contracted revenues. More importantly, GenOn reduced its adjusted EBITDA guidance for 2012 to $496 million from $608 million, and initiated adjusted EBITDA guidance for 2013 of $761 million. Merger integration remains on track to achieve $160 million annual cost savings starting in January 2012.
150
December 13, 2011
High Yield
Company description
GenOn Energy Inc. was formed on December 6, 2010, following the completion of the merger between RRI Energy Inc. and Mirant Corp. Under the proposed merger, RRI was renamed GenOn, and Mirant Corp. merged into a subsidiary of GenOn and is the surviving company. The combined companies have about 24.7GW of generation capacity, with about 12.1GW in the Mid-Atlantic and 5.7GW in the California regions. The companys generation portfolio benefits from geographical diversity, with operations in four major regions, and dispatch diversity, with about one-third of its generation portfolio tied to baseload. Exhibit 175: GenOn financial summary and forecast
GenOn Energy Inc. (Mils $ unless otherwise noted) Income statement ratios Operating Income (EBIT) Earnings Before Interest, Taxes and Depreciation (EBITDA) EBITDAR EBITDA / Interest coverage ex non-recourse (x) EBITDA / Interest and preferred cov. ex non-recourse (x) EBITDAR / Interest coverage ex non-recourse (x) EBITDA less capex interest coverage (x) Return on average equity (%) Balance sheet ratios Total debt to total capital (GAAP; %) Adjusted GAAP Debt to total capitalization (%) Lease adjusted debt to total capitalization (%) Adjusted GAAP debt to EBITDA (x) Lease adjusted debt to EBITDAR (x) Adjusted GAAP debt net of cash to EBITDA (x) Deferred regulatory assets to total assets (%) Cash flow ratios FFO cash interest coverage (x) FFO to total GAAP debt (%) FFO to lease adjusted debt (%) OCF interest coverage (x) NCF to lease adjusted debt (%) 2009 Actual $794.0 $943.0 $1,102.0 4.49 4.49 3.32 1.27 22.9% 37.9% 37.9% 47.6% 2.79 3.56 0.72 0.0% 5.38 32.6% 21.9% 5.15 21.9% 2010 Actual $279.0 $503.0 $651.0 1.93 1.93 1.73 0.77 -1.0% 51.9% 51.9% 56.5% 12.09 11.22 4.24 0.0% 2.40 5.8% 4.8% 1.80 4.8% 2011 Forecast $266.4 $602.8 $761.8 1.55 1.55 1.55 0.08 -0.7% 43.0% 43.0% 48.6% 6.99 6.95 4.44 0.0% 1.77 7.1% 5.6% 1.77 5.6% 2012 Forecast $92.7 $440.6 $592.6 1.14 1.14 1.24 (0.20) -3.4% 45.6% 45.6% 50.5% 10.30 9.31 6.89 0.0% 1.41 3.5% 2.9% 1.41 2.9% 2013 Forecast $338.9 $704.9 $856.9 1.76 1.76 1.77 1.04 -0.5% 46.0% 46.0% 50.3% 6.49 6.37 4.24 0.0% 1.85 7.4% 6.2% 1.85 6.2%
AES Corp.: Tight spreads and focus on shareholder return

Exhibit 176: AES benchmark security and CDS
Size (MM) 1,000 GS Rating U Coupon (%) 7.375 Priority Sr Unsec'd Maturity 1-Jul-21 Agency Ratings Ba3/BBNext Call Price Date Bid Price $106.00 YTW (%) 6.58 STW (bp) 457 5 year CDS 380/400

We expect AES Corp. (AES) to underperform given relatively tight trading levels as our recommendation reflects limited total return with a current yield of 6.53%, about 50 bp inside the BB index. The company has fundamentally enhanced its credit profile with the recent acquisition of DPL Inc. and the redeployment of equity sale proceeds toward debt reduction over the past year resulting in recent spread tightening. However, we remain
151
December 13, 2011
High Yield
concerned over managements recent announcements, which have been skewed to shareholders, with plans to initiate a common dividend in 2012 in addition to its $500 million share buyback program. Within the enterprise, we would prefer to move up to the intermediate-holding company, DPL Inc., 7.25% of 2021 notes given the higher ratings and flat trading levels. Alternatively, we recommend investors swap out of AES and into Calpine to capture the incremental g-spread of about 90 bp.

Key risks to our view include the possibility that management de-levers the balance sheet greater than our expectations.

For the coming year, we expect AESs parents financial metrics to continue to improve following the closing of the DPL Inc. acquisition. This should improve the parent cash flows with regulated operations expected to account for about 40% of subsidiary distributions compared to about 25% historically. Leverage should fall to about 4x when including preferred securities from about 5x barring any potential notable investment or acquisition. In November 2011, AES completed the acquisition of DPL Inc. for approximately $3.5 billion in cash consideration. DPL became a wholly owned subsidiary of AES and is expected to contribute $200-300 million in distributions according to the company. Separately, the company has repurchased 17.6 million shares during 3Q and 4Q, bringing its total repurchases to $378 million since July 2010. This is consistent with its $500 million share repurchase plan. Furthermore, the company expects to initiate an annual common dividend of $120 million starting in 3Q2012. Management continues to explore the potential monetization of non-core assets and recently announced the sale of its telecom assets under its Brasiliana unit for $900 mn, with proceeds expected to repay Brasiliana holding company debt, and the sale of an 80% interest in a unit that owns 70.81% in AES Energia Cartagena for $234 mn. However, we believe management will redeploy proceeds in core regions.
Company description
AES is a global power holding company with subsidiaries and investments located in North America, Latin America, Europe, Africa, and Asia (including the Middle East). AES is engaged in both regulated electric utility and unregulated generation. AES has generation interests in 27 countries, with about 40GW of generation capacity and distribution networks that serve over 11 million people. China Investment Corp. has a 15% equity ownership stake in the company. In 2010, Latin America was the largest contributor of subsidiary distributions at 37%. North America accounted for 26% of 2010 distributions, while Europe (17%) and Asia (8%) and others comprising the balance. Key subsidiaries include DPL Inc., IPALCO Enterprises Inc., AES Gener SA, and Brasilana.
152
December 13, 2011
High Yield
Exhibit 177: AES financial summary and outlook

AES Corp. Sources and Uses (millions $) Parent Sources Subsidiary distributions Total subsidiary distributions Other Sources Debt issuance Proceeds from asset sales and wind loan Issuance from common stock Other financings / return of capital Total Sources Parent Uses Cash for development, SG&A Parent interest expense Investment in subsidiaries and projects Stock repurchase and common dividend Debt maturities/retirements - secured Debt maturities/retirements - unsecured Other uses Total Uses Net parent sources and uses for year Prior year cash position Other adjustments Ending period cash balance AES Parent Debt Parent secured debt Parent unsecured debt Total secured and unsecured debt subordinated debt Total parent debt (recourse) Ending cash position Net parent debt 2009A 2010A 2011E 2012E Mid-Point Mid-Point $1,250 $1,250 $2,050 $255 $0 $135 $3,690 ($450) ($417) ($2,980) ($347) ($203) ($268) $0 ($4,665) ($975) $1,260 $0 $285 2011E $1,050 $4,626 $5,676 $516 $6,192 $285 $5,907 $1,500 $1,500 $0 $0 $0 $100 $1,600 ($400) ($468) ($400) ($280) ($11) $0 $0 ($1,559) $41 $285 $0 $326 2012E $1,039 $4,626 $5,665 $516 $6,181 $326 $5,855
$1,255 $1,255 $492 ($3) $6 $158 $1,908 ($356) ($464) ($519) $0 $0 ($153) $0 ($1,492) $416 $482 ($83) $815 2009A $890 $4,142 $5,032 $517 $5,549 $815 $4,734 2009A
$1,219 $1,219 $0 $399 $1,572 $171 $3,361 ($374) ($434) ($1,076) ($99) $0 ($914) $0 ($2,897) $464 $815 ($19) $1,260 2010A $200 $3,923 $4,123 $517 $4,640 $1,260 $3,380 2010A 2.8 0.2 3.4 3.8 2.3 2.8
Key Ratios Parent sub distributions interest coverage (x) Secured parent debt to subsidiary distributions (x) Parent debt to sub distributions (x) Parent debt and preferred to sub distributions (x) Net parent debt to sub distributions (x) Net parent debt and preferred to sub distributions (x)
Source: Company documents and Goldman Sachs Credit Research.
2.7 0.7 4.0 4.4 3.4 3.8
2012E 2011E Mid-Point Mid-Point 3.0 3.2 0.8 0.7 4.5 3.8 5.0 4.1 4.3 3.6 4.7 3.9
153
December 13, 2011
High Yield
Financial advisory disclosures

Goldman Sachs is acting as financial advisor to another party in an announced strategic transaction which may be material to Alcatel Lucent.
Clarksons disclosure
Clarkson Research Services Limited (CRSL) have not reviewed the context of any of the statistics or information contained in the commentaries and all statistics and information were obtained by Goldman Sachs & Co. from standard CRSL published sources. Furthermore, CRSL have not carried out any form of due diligence exercise on the information, as would be the case with finance raising documentation such as Initial Public Offerings (IPOs) or Bond Placements. Therefore reliance on the statistics and information contained within the commentaries will be for the risk of the party relying on the information and CRSL does not accept any liability whatsoever for relying on the statistics or information. Insofar as the statistical and graphical market information comes from CRSL, CRSL points out that such information is drawn from the CRSL database and other sources. CRSL has advised that: (i) some information in CRSLs database is derived from estimates or subjective judgments; and (ii) the information in the database of other maritime data collection agencies may differ from the information in CRSLs database; and (iii) whilst CRSL has taken reasonable care in the compilation of that statistical and graphical information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures and may accordingly contain errors; and (iv) CRSL, its agents, officers and employees do not accept liability for any loss suffered in consequence of reliance on such information or in any other manner; and (v) the provision of such information does not obviate any need to make appropriate further enquiries; and (vi) the provision of such information is not an endorsement of any commercial policies and/or any conclusions by CRSL; and (vii) shipping is a variable and cyclical business and any forecasting concerning it cannot be very accurate.
154
December 13, 2011
High Yield

Director of Credit Research Anne Brennan, CFA 1-212-902-9757
High Yield Research Airlines, Metals & Mining, Shipping Justine Fisher Joshua Pinkerton Autos Brian Jacoby, CFA Cody Sauer, CFA Building Materials Carly Mattson Mike Adler Cable, Satellite & Towers, Telecom Jason Kim Satya Tagat Chemicals, Homebuilders Kristen McDuffy Adam Goodwin Energy Jason Gilbert Sarah Yanes Food & Beverage, Retail, Restaurants Karen Eltrich Jordan Hughes Gaming, Lodging & Leisure, Consumer & Apparel Kevin Coyne Celeste Everett Healthcare Erin Blum Cindy Guan Industrials James Kitchell Paper & Forest Products, Packaging & Containers Joseph Stivaletti James Kitchell 1-212-902-3299 1-212-902-9813 US Credit Strategy Technology, Rental Services, Auto Suppliers Franklin Jarman Karl Blunden Utilities, Power & Project Finance Raymond M. Leung Abayomi A. Adigun, Ph.D. 1-212-357-5764 1-212-902-9355 1-212-902-7537 1-212-357-2769 Charlie Himmelberg Lotfi Karoui Annie Chu US Economics Jan Hatzius Andrew Tilton 1-212-902-0394 1-212-357-2619 1-917-343-3218 1-917-343-1548 1-212-357-5522 Credit Strategy and Economics 1-212-902-9813 1-212-855-7718 1-212-902-9758 1-212-357-9918 1-212-902-4751 Telecom, Media & Cable Scott Marchakitus, CFA Scott Wipperman, CFA Utilities, Power & Project Finance Raymond M. Leung Abayomi A. Adigun, Ph.D. 1-212-357-5764 1-212-902-9355 1-212-902-9760 1-212-357-9922 1-212-902-6957 1-212-357-7875 Retail, Consumer, Technology Gregory Chwatko Annalee Bloomfield 1-212-902-0673 1-212-902-8028 1-212-902-3585 1-212-357-5869 Life and Non-Life (Re)Insurance, and Managed Care Donna Halverstadt Amanda Lynam, CPA 1-212-902-3281 1-212-902-9238 1-212-357-6157 1-212-902-0459 Healthcare REITs Erin Blum Cindy Guan 1-212-855-7718 1-212-902-9758 1-212-902-2233 1-212-902-4427 1-212-902-6712 1-212-902-9761 1-212-902-3258 1-212-855-8553 1-212-357-6711 1-212-357-9774 Brian Jacoby, CFA Cody Sauer, CFA Basic Industries, Building Materials Carly Mattson Mike Adler Energy Jason Gilbert Sarah Yanes Global Banks & Finance, Real Estate (REITs) Louise Pitt Ron Perrotta Healthcare Amanda Lynam, CPA 1-212-902-3644 1-212-902-7885 1-212-902-3585 1-212-357-5869 1-212-902-6712 1-212-902-9761 Investment Grade Research
Aerospace & Defense, Autos, Capital Goods, Diversified Industrials, Transportation(Rails)
1-212-902-3258 1-212-855-8553
1-212-902-9238
Administrator Maria Lipes 1-212-902-9759
Production Lisa Messemer William Tompkins 1-212-902-0097 1-212-902-6415
E-mail: firstname.lastname@gs.com
155
December 13, 2011
High Yield
Disclosure Appendix
Reg AC
We, Charles P. Himmelberg, Erin Blum, Kevin Coyne, Karen Eltrich, Justine Fisher, Jason Gilbert, Brian Jacoby, CFA, Franklin Jarman, Jason Kim, Carly Mattson, Kristen McDuffy, Raymond M. Leung and Joe Stivaletti, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Each equity, credit and strategy research report excerpted herein was certified under Reg AC by the analyst primarily responsible for such report as follows: I, Name of Analyst, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures
Company-specific regulatory disclosures
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research.
Regulatory disclosures Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/comanaged public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman, Sachs & Co. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.
European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research. Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the Kanto
Financial Bureau (Registration No. 69), and is a member of Japan Securities Dealers Association (JSDA) and Financial Futures Association of Japan Goldman Sachs Credit Research 156
December 13, 2011
High Yield
(FFAJ). Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company.
Ratings, coverage groups and views and related definitions

Credit Research assigns ratings to designated on-the-run ("OTR") debt securities of issuing companies. Definitions of Ratings: OP = Outperform. We expect the total return to outperform the median total return for the analyst's coverage group over the next 6 months. IL = In-Line. We expect the total return to perform in line with the median total return for the analyst's coverage group over the next 6 months. U = Underperform. We expect the total return to underperform the median total return for the analyst's coverage group over the next 6 months. TB = Trading Buy. We expect the total return to outperform in the short term (3 months). TS = Trading Sell. We expect the total return to underperform in the short term (3 months).
NR = Not Rated. The investment rating, if any, has been removed pursuant to Goldman Sachs policy when to Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. NC = Not Covered. Goldman Sachs does not cover this company. RS = Rating Suspended. Goldman Sachs Research has suspended the investment rating for this credit, because there
is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating. The previous investment rating is no longer in effect for this credit and should not be relied upon. CS = Coverage Suspended. Goldman Sachs has suspended coverage of this company. NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
Coverage views: The coverage view represents each analyst's or analyst team's investment outlook on his/her/their coverage group(s). The coverage view will consist of one of the following designations: Attractive (A). The investment outlook over the following 6 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 6 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 6 months is unfavorable relative
to the coverage group's historical fundamentals and/or valuation.
Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Banco Mltiplo S.A.; in Canada by Goldman, Sachs & Co. regarding Canadian equities and by Goldman, Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.
European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG, regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht, may also distribute research in Germany.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org). Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transactions cost may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to http://360.gs.com. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282. Copyright 2011 Goldman Sachs.
157
December 13, 2011
High Yield
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.
158

Ideas

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ideas

Uploaded by

Copyright:

Available Formats

December 13, 2011

2012 High Yield Credit Outlook & Best Ideas

Picks & Pans

Short-term risk from Europe still looms: Play defense

The Goldman Sachs Group, Inc.

Global Investment Research

December 13, 2011

December 13, 2011

Goldman Sachs Credit Research

December 13, 2011

Coverage Views and Picks & Pans

Mohawk Industries, Inc. Cablevision Systems Corp.

Energy XXI Gulf Coast Inc.

Apria Healthcare Tenet Healthcare Corp. Beazer Homes USA, Inc.

Fortescue Metals Group Limited Novelis, Inc.

James River Coal Company US Steel Corporation

Berry Plastics Corporation Reynolds Group Holdings Limited Louisiana-Pacific Corporation

Leap Wireless International, Inc. Lessors Post-2009 B tranches

Frontier Communications Corp. Routes/Slots deals

Navios Maritime Holdings Inc. GenOn Energy, Inc.

Overseas Shipholding Group, Inc. AES Corp.

Goldman Sachs Credit Research

December 13, 2011

Credit Strategy: Short-term risks loom large: Play defense

Goldman Sachs Credit Research

December 13, 2011

Source: Goldman Sachs Credit Strategy, Compustat.

Goldman Sachs Credit Research

December 13, 2011

Exhibit 3: We expect HY fund flows to remain volatile in 2012

Treasury return Excess return Total return

(1,000) (2,000) (3,000)

Source: Goldman Sachs Credit Strategy, Bloomberg.

Source: Goldman Sachs Credit Strategy, AMG.

The credit risk premium is highest for high-quality bonds

December 13, 2011

Source: Goldman Sachs Credit Strategy, BEA.

Rating BB CRP 5-yr cum loss rate

Baseline B 6.4 CCC 5.1 HY

Scenario Optimistic BB 5.6 B 6.8 CCC 6.9 14.1% HY

Pessimistic BB 5.3 B 5.6 CCC 2.0 HY* 6.5 7.8% 4.8

4.4% 1.4% 4.0% 21.6%

Source: Goldman Sachs Credit Strategy, Moodys, Bloomberg.

Goldman Sachs Credit Research

December 13, 2011

Exhibit 6: Our CRP estimates for BB-rated bonds

Exhibit 7: Our CRP estimates for B-rated bonds

Source: Goldman Sachs Credit Strategy, Moodys, Bloomberg.

Source: Goldman Sachs Credit Strategy, Moodys, Bloomberg.

Goldman Sachs Credit Research

December 13, 2011

Exhibit 8: Our CRP estimates for CCC-rated bonds

Source: Goldman Sachs Credit Strategy, Moodys, Bloomberg.

Source: Goldman Sachs Credit Strategy, Moodys.

Source: Goldman Sachs Credit Strategy, Moodys.

Goldman Sachs Credit Research

December 13, 2011

Source: Goldman Sachs Credit Strategy, Moodys.

Goldman Sachs Credit Research

December 13, 2011

Autos & Auto Suppliers: Coverage view and recommendations

December 13, 2011

13,011 (12.2%) 6,083 309.0% 19,094 17.1% FY10

9,643 28.6% 7,471 34.5% 17,113 31.1% FY10