BA – Traded CDS 199bps, Base Case iCDS 13bps, Negative Case iCDS 25bps, 2027 5.040% Bond YTW of 4.888%, iYTW of 3.113%, Baa2 Rating from Moody’s, IG4 (equivalent to Baa2) Rating from Valens, Low Refinancing Need

May 16, 2022

  • Credit markets are materially overstating BA’s credit risk with a YTW of 4.888% and CDS of 199bps, relative to an Intrinsic YTW of 3.113% and Intrinsic CDS of 13bps. Meanwhile, Moody’s is accurately stating the firm’s fundamental credit risk, with its investment grade Baa2 credit rating in line with Valens’ IG4 (Baa2) credit rating.
  • Incentives Dictate Behavior™ analysis highlights that BA’s management compensation framework is mostly favorable for credit holders. Specifically, it should drive them to focus on all three value drivers: margin expansion, asset efficiency, and top-line growth, which should lead to Uniform ROA expansion and increased cash flows available for servicing obligations. Additionally, management has no change-in-control compensation, and given the firm’s scale, it is unlikely to be a target for a buyout or acquisition, reducing event risk for creditors.
  • Earnings Call Forensics™ analysis of the firm’s Q1 2022 earnings call (4/27) highlights that management is confident they don’t expect resources for development programs to be a constraint.

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