IAA – No Traded CDS, Base Case iCDS 156bps, Negative Case iCDS 272bps, 2027 5.500% Bond YTW of 3.851%, iYTW of 2.641%, Ba3 Rating from Moody’s, IG4 (equivalent to Baa2) Rating from Valens, Low Refinancing Need

• Credit markets are overstating IAA’s credit risk with a YTW of 3.851%, relative to an Intrinsic YTW of 2.641% and an Intrinsic CDS of 156bps. Meanwhile, Moody’s is overstating the firm’s fundamental credit risk, with its speculative Ba3 credit rating four notches lower than Valens’ IG4 (Baa2) credit rating.
• Incentives Dictate Behavior™ analysis highlights mostly positive signals for creditors. Specifically, IAA’s compensation metrics will likely drive management to focus on all three value drivers: margin expansion, asset efficiency, and top-line growth, which should lead to Uniform ROA expansion. Furthermore, while most management members are not material holders of IAA equity relative to their annual compensation, CEO Kett’s significant holdings indicate he may be able to convince other NEOs to align with shareholders for long-term value creation.
• Earnings Call Forensics™ of the firm’s Q2 2021 earnings call (8/3) highlights that management is confident they are focused on driving competitive differentiation and growth through technology and innovation.