MTW Valens Credit Analysis – No Traded CDS, Base Case iCDS 495bps, Negative Case iCDS 812bps, 2026 9.000% Bond YTW of 11.080%, iYTW of 5.440%, B2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need
March 26, 2020
Credit markets are grossly overstating MTW’s credit risk with a cash bond YTW of 11.080%, relative to an Intrinsic YTW of 5.440% and an Intrinsic CDS of 495bps. Furthermore, Moody’s is materially overstating the firm’s fundamental credit risk, with their highly speculative B2 credit rating seven notches lower than Valens’ IG4+ (Baa1) credit rating.
Fundamental analysis highlights that MTW’s cash flows should comfortably exceed operating obligations in each year going forward. In addition, the combination of the firm’s cash flows and expected cash build should be sufficient to service all obligations, including a material $300mn debt maturity in 2026. Furthermore, MTW boasts a robust 140% recovery rate on unsecured debt, indicating the firm should be able to access credit markets to refinance, if necessary.
Earnings Call Forensics™ of the firm’s Q4 2019 earnings call (2/7) highlights that management generated an excitement marker when saying their aftermarket revenue grew by 2%, with overall margin improvement. In addition, they are confident their Q4 adjusted operating cash flow performance was outstanding and that their competitors have a lot of stored inventory
Incentives Dictate Behavior™ analysis highlights mostly 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 12.6x Uniform P/E (V/E’). At these levels, the market is pricing in expectations for Uniform ROA to remain at current 6% levels through 2024, accompanied by 3% Uniform Asset shrinkage going forward.