June 17, 2019

MTW Valens Credit Analysis – No Traded CDS, Base Case iCDS 330bps, Negative Case iCDS 795bps, 2026 9.000% Bond YTW of 9.296%, iYTW of 5.216%, B2 Rating from Moody’s, IG3+ (equivalent to A1) Rating from Valens, Low Refinancing Nee

  • Credit markets are grossly overstating MTW’s credit risk with a cash bond YTW of 9.296%, relative to an Intrinsic CDS of 330bps and Intrinsic YTW of 5.216%. Furthermore, Moody’s is grossly overstating the firm’s fundamental credit risk, with their highly speculative, high-yield B2 credit rating 10 notches lower than Valens’ IG3+ (A1) credit rating
  • Fundamental analysis highlights that MTW’s cash flows should exceed all obligations, including debt maturities, in each year through 2025. In addition, MTW boasts a robust 130% recovery rate on unsecured debt, indicating they should be able to access credit markets to refinance, if necessary
  • Incentives Dictate Behavior™ analysis highlights positive signals for credit holders. MTW’s compensation framework should drive management to focus on all three value drivers: sales, margins, and asset utilization, leading to Uniform ROA expansion and increased cash flows available for servicing obligations. In addition, most management members are not well compensated in a change-in-control, indicating they are not incentivized to pursue a sale or accept a buyout of the firm, reducing event risk
  • MTW currently trades below recent averages based on UAFRS-based (Uniform) Earnings, with a 12.9x Uniform P/E (V/E’). However, even at these levels, the market is pricing in expectations for Uniform ROA to expand from 4% in 2018 to 6% in 2023, accompanied by 2% Uniform Asset shrinkage going forward.
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