ESV Valens Credit Analysis – Robust recovery rate, substantial cash balance, and multi-year debt runway indicate that credit markets and ratings agencies are overstating credit risk

November 6, 2017

  • CDS markets are grossly overstating credit risk with a CDS of 551bps relative to an Intrinsic CDS of 285bps, while cash bond markets are overstating credit risk with a cash bond YTW of 5.674% relative to an Intrinsic YTW of 4.494%. Additionally, Moody’s is overstating ESV’s fundamental credit risk, viewing the firm as a highly speculative, high-yield B2 credit that is three notches wider than Valens’ HY1 (Ba2) rating
  • Incentives Dictate Behavior™ analysis highlights that ESV management’s compensation framework should focus management on driving growth while improving both margins and asset utilization, positives for credit investors. Also, management’s limited change-in-control compensation lowers event risk
  • Earnings Call Forensics™ of the firm’s Q2 2017 earnings call (7/27) highlights that management generated an excitement marker when talking about the high levels of operational performance that Atwood’s semisubmersibles have delivered to customers. Additionally, they are confident about the value of Atwood’s semisubmersibles and the strength of their balance sheet
  • ESV currently trades well below the value of their UAFRS-based (Uniform) Assets, with a 0.4x Uniform P/B. Market expectations are for Uniform ROA to remain below cost-of-capital levels going forward, which appears fairly bearish even in the context of challenging macroeconomic conditions, indicating that equity is likely undervalued. Moreover, should credit concerns about the firm ease, equity upside could be material, even without Uniform ROA improvement

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