MDR Valens Credit Analysis – Robust cash flows and sizable expected cash build indicate that cash bond markets and rating agencies are overstating credit risk

• Cash bond markets are overstating MDR’s credit risk with a cash bond YTW of 6.548% relative to an Intrinsic YTW of 5.388%, and an Intrinsic CDS of 298bps. Furthermore, Moody’s is materially overstating the firm’s fundamental credit risk, with their high-yield B1 rating six notches lower than Valens’ IG4+ (Baa1) rating
• Incentives Dictate Behavior™ analysis highlights positive signals for debt holders. MDR’s compensation metrics should drive management to focus on all three value drivers, leading to Uniform ROA expansion and increased cash flows available for servicing debt obligations
• Earnings Call Forensics™ of the firm’s Q4 2017 earnings call (2/21) highlights that management is confident that their AEA efforts are starting to pay off
• MDR currently trades near historical averages relative to UAFRS-based (Uniform) Assets, with a 1.4x Uniform P/B. As markets are pricing in expectations for declining profitability, fundamental driven equity upside is warranted should the firm simply maintain Uniform ROA at current levels