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AKS Valens Credit Analysis – CDS 410bps, Base Case iCDS 232bps, Negative Case iCDS 410bps, 2025 6.375% Bond YTW of 7.566%, iYTW of 5.276%, B2 Rating from Moody’s, XO (equivalent to Baa3) Rating from Valens, Moderate Refinancing Need

July 10, 2018

  • Credit markets are materially overstating AKS’ credit risk with a CDS of 410bps and YTW of 7.566% relative to an Intrinsic CDS of 232bps and an Intrinsic YTW of 5.276%. Additionally, Moody’s is materially overstating AKS’ fundamental credit risk, with their highly speculative B2 credit rating five notches lower than Valens’ XO (Baa3) rating
  • Incentives Dictate Behavior™ analysis highlights mostly positive signals for creditors. Management’s compensation metrics should drive them to focus on all three value drivers: revenue growth, margins and asset turnover, which should result in Uniform ROA improvement and higher cash flows available for servicing obligations. Moreover, most members of management are not well compensated in a change-in-control scenario, limiting event risk for creditors
  • Earnings Call Forensics™ of the firm’s Q1 2018 earnings call (4/30) highlights that management is confident in their adjusted EBITDA of $119mn, and in their Precision Partners integration efforts
  • AKS currently trades near the low end of historical valuations 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 2017 to 4% through 2022, accompanied by 1% Uniform Asset shrinkage going forward. Given that valuations are likely being compressed by the market’s inaccurate perception of the firm’s credit risk, AKS 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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