CPE – No Traded CDS, Base Case iCDS 149bps, Negative Case iCDS 235bps, 2028 8.000% Bond YTW of 7.643%, iYTW of 4.423%, B2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

May 23, 2022

  • Cash bond markets are grossly overstating credit risk, with a cash bond YTW of 7.643% relative to an Intrinsic YTW of 4.423% and an Intrinsic CDS of 149bps. Meanwhile, Moody’s is materially overstating the firm’s fundamental credit risk, with its highly speculative B2 credit rating seven notches below Valens’ IG4+ (Baa1) credit rating.

  • Incentive Dictate Behavior™ analysis highlights positive signals for both equity holders and creditors. Management’s compensation framework should drive them to focus primarily on asset efficiency and margin expansion, which should lead to Uniform ROA improvement. Furthermore, management is specifically compensated on limiting leverage, which should lead to higher cash flows available for servicing existing obligations. Moreover, most management members are not well-compensated in a change in control, indicating they are not incentivized to pursue a sale or accept a buyout of the firm, reducing event risk.

  • Earnings Call Forensics™ of the firm’s Q1 2022 earnings call (5/4) highlights that management is confident they are taking additional steps to further decrease operating costs.

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