MU – Base Case CDS 123bps, Base Case iCDS 41bps, Negative Case iCDS 81bps, 2027 4.185% Bond YTW of 4.524%, iYTW of 3.306%, Baa3 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

August 3, 2022

  • Credit markets are overstating credit risk, with a cash bond YTW of 4.524% and a CDS of 123bps relative to an Intrinsic YTW of 3.306% and an Intrinsic CDS of 41bps. Furthermore, Moody’s is also overstating MU’s fundamental credit risk with its Baa3 credit rating two notches below Valens’ IG4+ (Baa1) credit rating.
  • Incentives Dictate Behavior™ analysis highlights mostly favorable signals for credit holders. Management’s compensation framework should drive them to focus on all three value drivers; asset efficiency, margin expansion, and revenue growth, which should lead to Uniform ROA improvement and increased cash flows available for servicing obligations. Additionally, management members are material owners of MU equity relative to their annual compensation, indicating they may bewell-aligned with shareholders for long-term value creation.
  • Earnings Call Forensics™ of the firm’s Q3 2022 earnings call (6/30) highlights that management is confident they have outpaced the industry in cost reduction this year, that they will have a disciplined approach to operating expense reduction, and that networking and graphics segments tend to have more margin stability throughout a cycle.

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