KTOS – No CDS, Base Case iCDS 97bps, Negative Case iCDS 140bps, 2025 6.500% Bond YTW of 3.964%, iYTW of 1.804%, B1 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

May 25, 2021

  • Credit markets are materially overstating KTOS’ credit risk with a YTW of 3.964% relative to an Intrinsic YTW of 1.804% and an Intrinsic CDS of 97bps. Moody’s is also 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
  • Earnings Call Forensics™ of the firm’s Q1 2021 earnings call (05/05) highlights that management generated an excitement marker when saying the United States Navy is moving towards driving an air wing that is at least 50% or more unmanned. Also, they are confident Skyborg program testing will continue to increase