December 18, 2017

AVP Valens Credit Analysis – AVP’s Operational Sustainability and Healthy Liquidity Warrant Tightening of Credit Market Spreads

  • Credit markets are grossly overstating credit risk with a CDS of 980bps and a cash bond YTW of 9.747%, relative to an Intrinsic CDS of 529bps and an Intrinsic YTW of 7.127%. Additionally, Moody’s is materially overstating AVP’s fundamental credit risk, with their B1 credit rating five notches lower than Valens’ IG4 (Baa2) rating
  • Incentives Dictate Behavior™ analysis highlights that management’s compensation framework focuses them on all three value drivers, which should lead to higher cash flows available for servicing obligations. Moreover, management members have low change-in-control compensation, limiting event risk for creditors
  • AVP is currently trading at historical lows relative to UAFRS-based (Uniform) Assets, with a 1.5x Uniform P/B (V/A’). However, even at these levels, the market appears to be pricing in the best-case scenario for operational improvement, suggesting fundamental-driven equity upside is likely limited. That said, with elevated credit risk likely pressuring valuation multiples, there is the potential for material credit-driven equity upside should market perception of the firm’s credit risk improve

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