HES – CDS 144bps, Base Case iCDS 65bps, Negative Case iCDS 93bps, 2027 4.300% Bond YTW of 4.524%, iYTW of 3.696%, Ba1 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

May 17, 2022

  • Credit markets are overstating credit risk with a YTW of 4.524% and a CDS of 144bps relative to an Intrinsic YTW of 3.696% and an Intrinsic CDS of 65bps. Furthermore, Moody’s is overstating the firm’s fundamental credit risk, with its Ba1 credit rating three notches lower than Valens’ IG4+ (Baa1) credit rating.
  • Incentives Dictate Behavior™ analysis highlights mostly favorable signals for credit holders. Management’s compensation framework should drive them to focus on all three value drivers: asset efficiency, growth, and margins, which should lead to Uniform ROA improvement and higher cash flows available for servicing obligations. Additionally, management members are material owners of HES equity relative to their annual compensation, indicating they may be well-aligned with shareholders for long-term value creation.
  • Earnings Call Forensics™ of the firm’s Q1 2022 earnings call (4/27) highlights that management is confident net cash provided by operating activities was up by nearly $75 million compared with the prior quarter.

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