AKS Valens Credit Analysis – CDS 634bps, Base Case iCDS 246bps, Negative Case iCDS 799bps, 2023 7.500% Bond YTW of 7.178%, iYTW of 5.548%, B2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

• CDS markets are grossly overstating credit risk with a CDS of 634bps relative to an Intrinsic CDS of 246bps, while cash bond markets are materially overstating AKS’s credit risk with a YTW of 7.178% relative to an Intrinsic YTW of 5.548%. Additionally, Moody’s is materially overstating AKS’s fundamental credit risk, with their highly speculative B2 credit rating seven notches lower than Valens’ IG4+ (Baa1) 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, margin, 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
• 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 to 6% through 2022, accompanied by 2% 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 at these levels