MTW Valens Credit Analysis – Healthy cash flows and robust recovery rate indicate that ratings agencies and credit markets are overstating credit risk
March 2, 2018
- While cash bond markets are slightly overstating credit risk with a YTW of 6.014% relative to an iCDS of 294bps and an iYTW of 5.484%, Moody’s is materially overstating the firm’s fundamental credit risk, viewing the firm as a highly speculative, high-yield credit, with its Caa1 rating seven notches lower than Valens’ XO (Baa3) rating
- Incentives Dictate Behavior™ analysis highlights that MTW’s management compensation framework is positive for credit holders, as it should incentivize them to improve margins and asset utilization. Also, with low change-in-control compensation, management is not incentivized to pursue a sale or accept a buyout of the business, limiting event risk
- Earnings Call Forensics™ of the firm’s Q3 2017 earnings call (11/7) highlights that management is confident that lower production hours at Shady Grove are a result of their lattice boom crawler crane manufacturing slowing, and that their U.S. operations are a story of two tales, characterized by momentum in demand to support energy and commercial construction end markets, but low activity for large infrastructure projects
- MTW currently trades at historical lows relative to UAFRS-based (Uniform) Assets, with a 1.2x Uniform P/B. At these valuations, the market is pricing in expectations for Uniform ROA to rebound from current -5% levels in 2017 to 8% by 2022, accompanied by 2% Uniform Asset shrinkage going forward