GPS Valens Credit Analysis – CDS 615bps, Base Case iCDS 186bps, Negative Case iCDS 315bps, 2023 8.375% Cash Bond YTW of 8.374%, iYTW of 2.124%, Ba2 Rating from Moody’s, XO (equivalent to Baa3) Rating from Valens, Moderate Refinancing Need

• Credit markets are grossly overstating GPS’ credit risk with a cash bond YTW of 8.374% and a CDS of 615bps, relative to an Intrinsic YTW of 2.124% and an Intrinsic CDS of 186bps. Furthermore, Moody’s is overstating the firm’s fundamental credit risk, with its Ba2 credit rating two notches lower than Valens’ XO (Baa3) credit rating
• Earnings Call Forensics™ analysis of the firm’s Q4 2019 earnings call (3/12) highlights that management is confident Banana Republic had an acceleration in Q4 comp sales, that they generated a three-year average free cash flow of $700mn, and that they have accumulated a database of about 60 million known active customers. Furthermore, they are confident women’s apparel margin expansion outpaced the brand average and that their investments should take excess costs out of the system. In addition, they are confident that there are opportunities to improve inventory allocation based on channel demand and that the events of the last several years can serve as a positive catalyst for the company