May 10, 2019

RAD Valens Credit Analysis – CDS 1404bps, Base Case iCDS 523bps, Negative Case iCDS 1111bps, 2023 6.125% Bond YTW of 10.860%, iYTW of 7.470%, 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 1,404bps and a cash bond YTW of 10.860% relative to an Intrinsic CDS of 523bps and an Intrinsic YTW of 7.470%. 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 management members have low change-in-control compensation relative to their annual compensation, suggesting they are not incentivized to seek or accept a buyout or sale of the firm, reducing event risk
  • RAD currently trades near historical lows with a 0.8x Uniform P/B. At these levels, the market is pricing in expectations for Uniform ROA to increase from 4% in 2019 to 6% in 2024, accompanied by 3% 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

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