NAV Valens Credit Analysis – Robust cash flows and sizable expected cash build indicate that ratings agencies and cash bond markets are overstating risk

• CDS markets are accurately stating credit risk with a CDS of 264bps relative to an Intrinsic CDS of 234bps, while cash bond markets are overstating credit risk with a cash bond YTW of 6.066% relative to an Intrinsic YTW of 5.256%. Furthermore, Moody’s is materially overstating NAV’s fundamental credit risk, viewing the firm as a highly speculative, high-yield credit, with its B3 rating seven notches lower than Valens’ IG4 (Baa2) rating
• Incentives Dictate Behavior™ analysis highlights mainly positive signals for credit holders. Overall, the compensation framework should focus management on all three value drivers, leading to increased cash flows available for servicing debt obligations and Uniform ROA expansion, positives for debtors. Furthermore, management members hold material amounts of NAV equity relative to their average annual compensation, indicating that they are likely to be well aligned with shareholders for long-term value creation
• Earnings Call Forensics™ of the firm’s Q4 2017 earnings call (12/19) highlights that management is confident in the latest freight transportation services index reaching an all-time high, and in their OnCommand Connection Marketplace giving them access to segments of the markets where they are underrepresented. Furthermore, they are confident in their progress towards launching big-bore diesel powertrains into their products by 2021
• NAV currently trades near historical highs relative to Uniform Assets, with a 2.3x Uniform P/B (V/A′). At these levels, the market is pricing in expectations for Uniform ROA to continue recent improvements and grow from 8% in 2017 to 15% in 2022, accompanied by 1% Uniform Asset shrinkage going forward, indicating the equity markets may already be pricing in a successful turnaround