RAD Valens Credit Analysis – CDS 1,193bps, Base Case iCDS 371bps, Negative Case iCDS 786bps, 2023 6.125% Bond YTW of 11.290%, iYTW of 6.260%, B3 Rating from Moody’s, XO (equivalent to Baa3) Rating from Valens, High Refinancing Need

• Credit markets are grossly overstating RAD’s credit risk, with a CDS of 1,193bps and a cash bond YTW of 11.290% relative to an Intrinsic CDS of 371bps and an Intrinsic YTW of 6.260%. Furthermore, Moody’s is materially overstating the firm’s fundamental credit risk, with their highly speculative, high-yield B3 credit rating six notches lower than Valens’ XO (Baa3) credit rating.
• Incentives Dictate Behavior™ analysis highlights that members of management have low change-in-control compensation relative to their annual compensation, with multiple ranging from 1.4x to 2.4x. This reduces credit event risk as management is not well-incentivized to seek or accept a change-in-control.
• RAD currently trades below recent averages with a 0.9x Uniform P/B (V/A’). At these levels, the market is pricing in expectations for Uniform ROA to increase from 4% in 2018 to 6% levels through 2023, accompanied by 1% Uniform Asset shrinkage going forward. Given that valuations are likely being compressed by the market’s inaccurate perception of the firm’s credit risk, RAD could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement.