MNI Valens Credit Analysis – Operational sustainability and a multi-year debt runway indicate that ratings agencies are overstating risk, while potential refinancing headwinds indicate that credit markets are grossly understating credit risk
January 18, 2018
- CDS markets and cash bond markets are both grossly understating credit risk, with a CDS of 927bps relative to an Intrinsic CDS of 1,493bps, and a cash bond YTW of 7.920% relative to an Intrinsic YTW of 17.260%. However, Moody’s is materially overstating MNI’s fundamental credit risk, with their Caa1 credit rating seven notches lower than Valens’ XO (Baa3) rating
- Incentives Dictate Behavior™ analysis highlights that MNI’s compensation framework is mostly favorable for debt holders as it aligns them to improve margins, asset utilization, and to a lesser extent, growth. This should lead to a higher Uniform ROA and improved cash flows available for servicing debt obligations over time. Additionally, management has low change-in-control compensation indicating that they are not incentivized to accept a buyout or seek a sale of the company, reducing event risk for creditors
- MNI currently trades near historical lows, with a 1.1x UAFRS-based (Uniform) P/B. At these levels, the market is pricing in expectations for Uniform ROA to remain at 8% levels going forward, accompanied by 1% Uniform Asset shrinkage. Given that valuations are taking into account the market’s inaccurate perception of the firm’s credit risk, MNI could see material credit-driven equity downside if credit spreads tighten, even without fundamental changes