AER Valens Credit Analysis – CDS 84bps, Base Case iCDS 258bps, Negative Case iCDS 368bps, 2024 4.875% Bond YTW of 3.825%, iYTW of 4.995%, BBB- Rating from S&P, HY2 (equivalent to B) Rating from Valens, High Refinancing Need

• CDS markets are materially understating AER’s credit risk with a CDS of 84bps relative to an Intrinsic CDS of 258bps, while cash bond markets are understating credit risk with a YTW of 3.825% relative to an Intrinsic YTW of 4.995%. Moreover, Moody’s is materially understating AER’s fundamental credit risk, with their highly speculative BBB- credit rating five notches higher than Valens’ HY2 (B) rating
• Incentives Dictate Behavior™ analysis highlights that most management members are not material holders of the firm’s equity, indicating they may not be well-aligned with shareholders for long-term value creation. In addition, there is no publicly disclosed information on AER’s compensation framework, making it difficult to understand how well management is aligned in terms of value creation for the business, highlighting risk in the information gap between the firm and investors
• Earnings Call Forensics™ of the firm’s Q4 2018 earnings call (2/14) highlights that management may be concerned about increases in their debt-to-equity ratio, mark-to-market losses, and their ability to sell midlife and older aircraft. Moreover, they may lack confidence in their ability to reduce SG&A, sustain aircraft gain on sales margin, and maintain strong European performance. Also, they may be exaggerating the strength of their risk management policies, their ability to generate value for shareholders, and their historical cash flow-generating capabilities. Finally, they may be concerned about their Chinese market share, AerCap platform activity, and their ability to meet customer demand
• AER currently trades near historical averages relative to UAFRS-based (Uniform) Earnings, with a 19.0x Uniform P/E. At these levels, the market is pricing in expectations for Uniform ROA to decline to 6% levels through 2023, accompanied by 7% Uniform Asset growth going forward.