AL Valens Credit Analysis – Limited liquidity levels and consistent material debt maturities indicate credit markets are understating credit risk

• Credit markets are materially understating credit risk with a cash bond YTW of 3.302% relative to an Intrinsic YTW of 5.592% and an Intrinsic CDS of 312bps. Meanwhile, S&P is accurately stating AL’s fundamental credit risk, with their BBB rating only one notch higher than Valens’ XO (BBB-) rating
• Incentives Dictate Behavior™ analysis highlights that AL’s management compensation framework may incentivize the team to take on excess leverage to drive greater ROE
• Earnings Call Forensics™ of the firm’s Q3 2017 earnings call (11/9) highlights that management may have concerns about the sustainability of aircraft sales, as well as the increase in single aisle demand. They may also lack confidence in incremental lease revenue growth in the used aircraft marketplace
• AL currently trades below historical averages relative to UAFRS-based (Uniform) Assets, with a 1.3x Uniform P/B. At these levels, the market is pricing in expectations for Uniform ROA to remain at 6% levels, accompanied by 10% Uniform Asset growth going forward, indicating equity markets are also failing to price in the firm’s fundamental risks