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KTOS – No CDS, Base Case iCDS 101bps, Negative Case iCDS 138bps, 2025 6.500% Bond YTW of 3.310%, iYTW of 2.280%, B1 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

November 22, 2021

  • Credit markets are overstating credit risk with a YTW of 3.310% relative to an Intrinsic YTW of 2.280% and an Intrinsic CDS of 101bps. Furthermore, Moody’s is materially overstating the firm’s fundamental credit risk, with its highly speculative B1 credit rating six notches lower than Valens’ IG4+ (Baa1) credit rating
  • Incentives Dictate Behavior™ analysis highlights mixed signals for credit holders. Management’s compensation framework should drive them to focus on improving all three value drivers; margins, top-line growth, and asset utilization, which should lead to Uniform ROA improvement and higher cash flows available for servicing obligations. In addition, management members are material owners of KTOS equity relative to their annual compensation, indicating they should be well-aligned with shareholders for long-term value creation
  • Valens’ qualitative analysis of the firm’s Q3 2021 earnings call (11/03) highlights that management is confident tactical drone-related programs continue to progress and that the Gremlins program is planning an additional phase. Moreover, they are confident they have an industry-leading position in the next-generation UAV space and that the now-discontinued legacy International training business has been masking the firm’s overall core business growth rate. Furthermore, management is confident their favorable mix will continue based on their backlog, opportunities, and execution plans

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