February 28, 2018

CNX Valens Credit Analysis – Healthy cash flows, capex flexibility, and robust recovery rate indicate that ratings agencies and credit markets are overstating credit risk


  • While cash bond markets are materially overstating credit risk with a YTW of 5.823% relative to an iCDS of 156bps and an iYTW of 4.193%, Moody’s is overstating CNX’s fundamental credit risk, viewing the firm as a highly speculative, high-yield credit, with its B1 rating four notches lower than Valens’ XO (Baa3) rating
  • Incentives Dictate Behavior™ analysis highlights that CNX’s management compensation framework is positive for credit holders, as it should incentivize them to improve margins and asset utilization. Also, with low change-in-control compensation, management is not incentivized to pursue a sale or accept a buyout of the business, limiting event risk
  • CNX currently trades near historical lows relative to UAFRS-based (Uniform) Assets, with a 0.8x Uniform P/B. At these valuations, the market is pricing in expectations for Uniform ROA to rebound from current -2% levels in 2017 to 5% by 2022, accompanied by 2% Uniform Asset growth going forward

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