June 19, 2019

TDG Valens Credit Analysis – CDS 166bps, Base Case iCDS 227bps, Negative Case iCDS 280bps, 2024 6.500% Bond YTW of 6.299%, iYTW of 4.539%, Ba2 Rating from Moody’s, IG4 (equivalent to Baa2) Rating from Valens, Low Refinancing Need


  • Cash bond markets are materially overstating TDG’s credit risk with a YTW of 6.299%, relative to an Intrinsic YTW of 4.539%, while CDS markets are slightly understating risk with a CDS of 166bps, relative to an Intrinsic CDS of 227bps. Meanwhile, Moody’s is overstating the firm’s fundamental credit risk, with their high-yield Ba2 credit rating three notches lower than Valens’ IG4 (Baa2) credit rating
  • TDG’s cash flows should comfortably exceed operating obligations in each year going forward. Moreover, the combination of the firm’s cash flows and healthy liquidity levels should allow them to navigate all obligations including debt maturities through 2025, including consecutive $3.0bn+ debt headwalls in 2023, 2024, and 2025. Additionally, despite a non-existent recovery rate, the firm’s sizeable market capitalization and robust Uniform ROA levels should allow access to credit markets to refinance, if necessary
  • Incentives Dictate Behavior™ analysis highlights that management members are not well compensated in a change-in-control scenario, limiting event risk for creditors
  • Earnings Call Forensics™ of the firm’s Q2 2019 earnings call (5/7) highlights that management generated an excitement marker when saying they are willing to divest Esterline assets that do not fit their focus, when it is time to do so. In addition, they are confident in their projected year-end cash balance
  • TDG currently trades near historical highs relative to UAFRS-based (Uniform) Earnings, with a 22.2x Uniform P/E. However, even at these levels, the market is pricing in expectations for Uniform ROA to decline from 61% in 2018 to 31% in 2023, accompanied by 16% Uniform Asset growth going forward
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