AKS Valens Credit Analysis – CDS 968bps, Base Case iCDS 564bps, Negative Case iCDS 2,412bps, 2025 6.375% Bond YTW of 10.100%, iYTW of 7.270%, B2 Rating from Moody’s, HY1 (equivalent to Ba2) Rating from Valens, Moderate Refinancing Need

• Credit markets are grossly overstating credit risk with a YTW of 10.100% and a CDS of 968bps, relative to an Intrinsic YTW of 7.270% and an Intrinsic CDS of 564bps. Additionally, Moody’s is overstating AKS’ fundamental credit risk, with their highly speculative B2 credit rating three notches lower than Valens’ HY1 (Ba2) rating
• Incentives Dictate Behavior™ analysis highlights 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
• AKS 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, falling slightly from 4% in 2018 to 2% through 2023, accompanied by 3% 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
• Earnings Call Forensics™ of the firm’s Q3 2019 earnings call (10/31) highlights that management is confident they have reduced the market volatility of their pension plan and that they follow U.S. environmental regulation to the best of their ability. Furthermore, they are confident their third quarter met expectations despite challenging market conditions