MOH – Base Case CDS 143bps, Base Case iCDS 76bps, Negative Case iCDS 111bps, 2028 4.375% Bond YTW of 5.895%, iYTW of 4.665%, Ba3 Rating from Moody’s, IG3+ (equivalent to A1) Rating from Valens, Low Refinancing Need

January 16, 2024

  • Credit markets are overstating credit risk, with a cash bond YTW of 6.275% relative to an Intrinsic YTW of 5.485% and an Intrinsic CDS of 131bps. Furthermore, Moody’s is overstating TDG’s fundamental credit risk with its B1 credit rating four notches below Valens’ XO (Baa3) credit rating.
  • Incentives Dictate Behavior™ analysis highlights mostly negative signals for credit holders. However, most management members have low change-in-control compensation relative to their annual average compensation, indicating they are less likely to pursue a takeover or sale of the company, reducing event risk for creditors.
  • Earnings Call Forensics™ of the firm’s Q4 2023 earnings call (11/9) management may lack confidence in their ability to hit mid-teen commercial aftermarket growth guidance, sustain growth in commercial OEM sales, and maintain momentum in their bookings, particularly from their main customers. In addition, they may be concerned about OEM aircraft production and total air travel volumes still remaining below pandemic levels, and they may be downplaying concerns about declines in interior product volumes. Management may also be overstating the progress of the integration of the Calspan acquisition and the opportunities to pursue additional M&A opportunities in aerospace and defense, particularly on the commercial side. Moreover, they may be downplaying concerns about the high interest rate environment and the debt issuance necessary to complete the acquisition of CPI’s Electron Device business. Finally, management may be overstating the potential to use their capital structure and allocation to create value for shareholders, and they may be downplaying concerns about their cash balance. Lastly, they may be overstating the consistency of their strategy through cycles and their mix of sales and cash flows based on unique proprietary products.

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