December 18, 2018

CVI Valens Credit Analysis – No Traded CDS, Base Case iCDS 106bps, Negative Case iCDS 162bps, 2023 9.250% Bond YTW of 7.974%, iYTW of 4.664%, Ba3 Moody’s Rating, XO (equivalent to Baa3) Rating from Valens, High Refinancing Need

  • Cash bond markets are grossly overstating credit risk with a cash bond YTW of 7.974% relative to an Intrinsic YTW of 4.664%, and an Intrinsic CDS of 106bps, Meanwhile, Moody’s is overstating credit risk, with their Ba3 rating three notches lower than Valens’ XO (Baa3) rating
  • Fundamental analysis highlights that CVI’s cash flows would fall short of operating obligations in each year going forward. Meanwhile, the firm’s cash flows and cash on hand would fall short of servicing all obligations including debt maturities in 2022, when the firm faces a significant $500mn debt headwall. That said, while they will need to refinance to avoid a liquidity crunch, the firm has several years to improve operations before this first debt headwall, and their robust 200% recovery rate should allow them to access credit markets to refinance
  • Earnings Call Forensics™ of the firm’s Q3 2018 earnings call (10/25) highlights that management is confident that they run their facilities in a safe and environmentally responsible manner, and that they have increased their internally produced RINs by 5% of their total renewable volume application with their B5 blending. Additionally, they are confident in their ability to increase their total capacity of STACK, SCOOP type barrels in their refineries to 105,000 barrels a day
  • CVI currently trades above recent averages relative to UAFRS-based (Uniform) Assets, with a 1.7x Uniform P/B (V/A’). At these levels, the market is pricing in expectations for Uniform ROA to recover from 2% levels in 2017 to 13% levels in 2022, accompanied by 2% Uniform Asset shrinkage going forward
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