LPI – Base Case iCDS 234bps, Negative Case iCDS 425bps, 2028 10.125% Bond YTW of 10.180%, iYTW of 6.310%, B2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need
November 29, 2022
- Credit markets are grossly overstating credit risk with a YTW of 10.180% relative to an Intrinsic YTW of 6.310% and an Intrinsic CDS of 234bps. Furthermore, Moody’s is materially overstating LPI’s fundamental credit risk with its B2 credit rating seven notches below Valens’ IG4+ (Baa1) credit rating.
- Fundamental analysis highlights that LPI’s cash flows should exceed operating obligations in each year going forward by $81 million to $404 million, an annual 10%-73% buffer. Moreover, the combination of LPI’s cash flows and cash on hand should be sufficient to cover all obligations through 2028, including material debt headwalls in 2025 and 2028. Meanwhile, LPI has sizable capex flexibility to free up liquidity in the short-term and cover potential cash shortfalls, if needed. Furthermore, the firm’s robust 350% recovery rate on unsecured debt should allow access to credit markets to refinance, if necessary, albeit at potentially unfavorable rates given its limited market capitalization.
- Incentives Dictate Behavior™ analysis highlights mostly positive signals for credit holders. LPI’s compensation metrics should incentivize management to focus on all three value drivers: revenue, margins, and asset utilization, which should lead to Uniform ROA improvement and increased cash flows available for servicing debt. Moreover, most management members are material owners of LPI equity relative to their annual compensation, indicating they may be aligned with shareholders to pursue long-term value creation for the company.
