November 6, 2017

SVU Valens Credit Analysis – Operational sustainability, healthy liquidity levels, and robust recovery rate indicate that ratings agencies and credit markets are materially overstating fundamental credit risk

  • CDS markets are grossly overstating credit risk with a CDS of 717bps relative to an Intrinsic CDS of 396bps, while cash bond markets are materially overstating credit risk with a cash bond YTW of 8.309% relative to an Intrinsic YTW of 5.979%. Additionally, Moody’s is materially overstating SVU’s fundamental credit risk, viewing the firm as a highly speculative, high-yield B1 credit, five notches lower than Valens’ IG4 (Baa2) credit rating
  • Incentives Dictate Behavior™ analysis indicates that SVU’s management compensation framework is positive for credit holders as it aligns management to concentrate on Uniform ROA expansion, which should lead to higher cash flows available for servicing obligations going forward. Additionally, management members are not well compensated in a change-in-control, limiting event risk for creditors
  • Earnings Call Forensics™ of the firm’s Q2 2018 earnings call (10/18) highlights that management is confident about their 2018 capital spending guidance range
  • SVU currently trades near historic lows, with a 0.8x UAFRS-based (Uniform) P/B. Given that valuations are likely being compressed as a result of the market’s perception of the firm’s credit risk, SVU could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement. Moreover, at current levels equity downside is likely limited, as asset values begin to offer a floor to valuations
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