ADNT Valens Credit Analysis – No Traded CDS, Base Case iCDS 242bps, Negative Case iCDS 719bps, 2024 3.500% Bond YTW of 7.656%, iYTW of 2.246%, B2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need
June 26, 2019
- Cash bond markets are grossly overstating ADNT’s credit risk with a YTW of 7.656% relative to an Intrinsic CDS of 242bps and an Intrinsic YTW of 2.246%. Additionally, Moody’s is materially overstating ADNT’s fundamental credit risk, with their highly speculative B2 credit rating seven notches lower than Valens’ IG4+ (Baa1) rating
- Incentives Dictate Behavior™ analysis highlights mixed signals for creditors. ADNT’s compensation framework should drive management to focus on all three value drivers: asset utilization, margin expansion, and top-line growth, which should lead to Uniform ROA improvement and increased cash flows available for servicing obligations going forward. In addition, management has low change-in-control compensation relative to their average annual compensation, indicating they are unlikely to pursue a sale or buyout of the firm, reducing event risk
- Earnings Call Forensics™ of the firm’s Q2 2019 earnings call (5/7) highlights that management is confident in their ability to close their margin gap in out-years, their focus on disruptive organizational operations, and their ability to identify gaps in customer expectations
- ADNT currently trades at a material discount relative to UAFRS-based (Uniform) Assets, with a 0.7x Uniform P/B (V/A’). At these levels, the market is pricing in expectations for Uniform ROA to remain muted, and only improve from 4% in 2018 to 5% through 2023, accompanied by immaterial Uniform Asset growth going forward. Given that valuations are likely being compressed by the market’s inaccurate perception of the firm’s credit risk, ADNT 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 at these levels
