AVP Valens Credit Analysis – 682bps CDS, Base Case iCDS 338bps, Negative Case iCDS 834bps, 2023 5.000% Bond YTW of 9.268%, iYTW of 6.338%, B1 Rating from Moody’s, XO (equivalent to Baa3) Rating from Valens, Low Refinancing Need

• Credit markets are grossly overstating credit risk with a CDS of 682bps and a cash bond YTW of 9.268%, relative to an Intrinsic CDS of 338bps and an Intrinsic YTW of 6.338%. Additionally, Moody’s is overstating AVP’s fundamental credit risk, with their B1 credit rating four notches lower than Valens’ XO (Baa3) rating
• Incentives Dictate Behavior™ analysis highlights that management’s compensation framework focuses them on all three value drivers, which should lead to Uniform ROA expansion and higher cash flows available for servicing obligations. Moreover, management members have low change-in-control compensation, limiting event risk for creditors
• AVP is currently trading near historical lows relative to UAFRS-based (Uniform) Earnings, with a 17.0x Uniform P/E (Fwd V/E’). At these levels, the market is pricing in expectations for Uniform ROA to maintain current 10%-11% levels 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, AVP could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement