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MEG:CAN Valens Credit Analysis – Healthy cash flows, capex flexibility, and moderate recovery rate indicate that ratings agencies and credit markets are overstating credit risk

March 14, 2018

  • While cash bond markets are grossly overstating credit risk with a YTW of 10.591% relative to an iCDS of 264bps and an iYTW of 5.301%, Moody’s is materially overstating MEG:CAN’s fundamental credit risk, with their high-yield B3 credit rating six notches lower than Valens’ XO (Baa3) rating
  • Incentives Dictate Behavior™ analysis highlights that MEG’s management compensation framework is positive for credit holders, as it should incentivize them to improve margins, turns, and revenue growth. 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. Furthermore, as CEO McCaffrey is a material holder of MEG equity relative to his annual compensation, he will likely be able to influence other members of management to act in line with shareholder interests, leading to long-term value creation
  • MEG currently trades near historical lows relative to UAFRS-based (Uniform) Assets, with a 1.1x Uniform P/B. At these valuations, the market is pricing in expectations for Uniform ROA to rebound from current 3% levels in 2017 to 11% by 2022, accompanied by 10% Uniform Asset shrinkage going forward

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