GATX – CDS 188bps, Base Case iCDS 179bps, Negative Case iCDS 203bps, 2026 3.250% Bond YTW of 1.553%, iYTW of 2.523%, Baa2 Rating from Moody’s, HY1 (equivalent to Ba2) Rating from Valens, High Refinancing Need

August 3, 2021

  • Cash bond markets are understating credit risk, with a YTW of 1.553%, relative to an Intrinsic YTW of 2.523%. Furthermore, Moody’s is understating the firm’s fundamental credit risk, with its Baa2 credit rating three notches higher than Valens’ HY1 (Ba2) credit rating
  • Incentives Dictate Behavior™ analysis highlights that management’s compensation framework does not punish management for overleveraging the balance sheet or over-spending on assets, potentially limiting cash available for servicing debt
  • Earnings Call Forensics™ of the firm’s Q2 2021 earnings call (07/20) highlights that management may lack confidence in their ability to sustain higher utilization and lease rates, provide accurate quarterly guidance, and continue creating excess capacity and driving throughput through their shops. Furthermore, they may also have concerns about SNCF’s exclusive agreement with CDPQ and DWS over the sale of Ermewa and the sustainability of revenue increases in the North America segment. Finally, management may be concerned about the availability of investment opportunities in the aircraft engine leasing business and may be overstating the progress of efforts to structurally reduce costs