CNC – CDS 130bps, Base Case iCDS 97bps, Negative Case iCDS 117bps, 2026 5.375% Bond YTW of 2.804%, iYTW of 1.164%, Ba1 Rating from Moody’s, IG4 (equivalent to Baa2) Rating from Valens, Low Refinancing Need

March 4, 2021

  • Cash bond markets are materially overstating credit risk, with a bond YTW of 2.804% relative to an Intrinsic YTW of 1.164%. Meanwhile, Moody’s is overstating the firm’s fundamental credit risk, with its non-investment grade Ba1 credit rating two notches lower than Valens’ IG4 (Baa2) credit rating

  • Incentives Dictate Behavior™ analysis highlights mostly positive signals for credit holders. Management’s compensation framework should drive them to focus heavily on margin expansion and revenue growth, which may lead to Uniform ROA improvement and higher cash flows available for servicing obligations, but may also encourage management to overleverage the balance sheet and overspend on assets in order to finance growth. In addition, management members are not well-compensated in a change-in-control, indicating they are unlikely to pursue a sale or accept a buyout of the firm, limiting event risk. Furthermore, although most management members are not material holders of CNC equity relative to their annual compensation, CEO Neidorff’s sizeable ownership indicates that he could influence other NEOs to align with shareholders for long-term value creation