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SQ – No Traded CDS, Base Case iCDS 90bps, Negative Case iCDS 206bps, 2026 2.750% Bond YTW of 6.618%, iYTW of 5.238%, Ba2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need
October 25, 2022
Credit markets are overstating SQ’s credit risk with a YTW of 6.618% relative to an Intrinsic YTW of 5.238% and an Intrinsic CDS of 90bps. 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. Furthermore, most members of management have low change-in-control compensation relative to their annual compensation. This indicates they may not be incentivized to pursue or accept a takeover or sale of the company, reducing event risk for creditors.
Earnings Call Forensics™ of SQ’s Q2 2022 (08/04/2022) call highlights that management is confident they are building accessible products, such as their Cash App Borrow short duration loans, and that they are adding to their online capabilities with Afterpay and more products to come. In addition, they are confident their data-driven approach allows them to effectively utilize their product data and move quickly to adapt to changing environments.
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