SQ – Base Case iCDS 67bps, Negative Case iCDS 167bps, 2026 2.750% Bond YTW of 6.540%, iYTW of 5.280%, Ba2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

March 9, 2023

  • Credit markets are overstating SQ’s credit risk with a YTW of 6.540% relative to an Intrinsic YTW of 5.280% and an Intrinsic CDS of 67bps. Furthermore, Moody’s is overstating SQ’s fundamental credit risk with its speculative Ba2 credit rating four notches below Valens’ IG4+ (Baa1) credit rating.

  • Incentives Dictate Behavior™ analysis highlights mixed signals for credit holders. Most management members are material owners of SQ equity relative to their annual compensation, indicating they may be aligned with shareholders to pursue long-term value creation for the company. Also, most members of management have low change-in-control compensation relative to their annual compensation. This indicates that they may not be incentivized to pursue or accept a takeover or sale of the company, decreasing event risk for creditors.

  • Earnings Call Forensics™ of SQ’s Q4 2022 (02/23/2022) call highlights that management is confident they are going to continue to use their investment model and that their gross profit retention and Rule of 40 targets are both clear and balance each other out. In addition, they are confident they are seeing month to month improvements in gross profit growth, that Cash App profitability will continue to improve, and that the network effect is positively affecting their business.

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