Moody’s is overstating the credit risk of Domtar Corporation (NYSE:UFS) with its Baa3 rating. Our fundamental analysis highlights a much safer credit profile for UFS, whose strong cash flows cover all their obligations including debt maturities, except in 2022. Moreover, their sizable expected cash build should allow them to service all obligations including debt maturities in 2022. We therefore rate UFS three notches higher at an IG3- credit rating, or an A3 equivalent using Moody’s ratings scale.
Cash bond markets are also slightly overstating credit risk with a cash bond YTW of 3.840% relative to an Intrinsic YTW of 3.140%, while CDS markets are accurately stating UFS’ credit risk with a CDS of 191bps relative to an Intrinsic CDS of 187bps.
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