March 26, 2019

ADNT Valens Credit Analysis – No Traded CDS, Base Case iCDS 267bps, Negative Case iCDS 942bps, 2024 3.500% Bond YTW of 9.430%, iYTW of 2.780%, B2 Rating from Moody’s, HY1 (equivalent to Ba2) Rating from Valens, Moderate Refinancing Need

  • Cash bond markets are grossly overstating ADNT’s credit risk with a YTW of 9.430% relative to an Intrinsic CDS of 267bps and an Intrinsic YTW of 2.780%. Additionally, Moody’s is overstating ADNT’s fundamental credit risk, with their highly speculative B2 credit rating three notches lower than Valens’ HY1 (Ba2) rating
  • Incentives Dictate Behavior™ analysis highlights mixed signals for creditors. Management is incentivized to focus on all three value drivers, which should lead to Uniform ROA improvement and increased cash flows available for servicing obligations going forward. However, management is not penalized for overleveraging the balance sheet, increasing risk for creditors. Moreover, management members are not material holders of ADNT equity and may not be well aligned with shareholders for long-term value creation
  • Earnings Call Forensics™ of the firm’s Q1 2019 earnings call (2/7) highlights that management is confident in their secured debt credit agreement, and SS&M and North American Seating restructuring timelines
  • ADNT currently trades at a material discount relative to UAFRS-based (Uniform) Assets, with a 0.6x Uniform P/B (V/A’). At these levels, the market is pricing in expectations for Uniform ROA to remain muted, and only improve from 2% in 2018 to 6% through 2023, accompanied by immaterial Uniform Asset shrinkage 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
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