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KTOS – No Traded CDS, Base Case iCDS 116bps, Negative Case iCDS 158bps, 2025 6.500% Bond YTW of 4.730%, iYTW of 2.020%, B1 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

March 12, 2021

  • Credit markets are grossly overstating KTOS’s credit risk with a YTW of 4.730% relative to an Intrinsic YTW of 2.020% and an Intrinsic CDS of 116bps. Meanwhile, 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
  • Earnings Call Forensics™ of the firm’s Q3 2020 earnings call (10/29) highlights that management generated an excitement marker when saying they are under contract for a number of tactical drone programs. In addition, they are confident in the success of Valkyrie and other drone systems