June 14, 2019

X Valens Credit Analysis – CDS 615bps, Base Case iCDS 270bps, Negative Case iCDS 729bps, 2025 6.875% Bond YTW of 8.649%, iYTW of 4.659%, B1 Rating from Moody’s, XO (equivalent to Baa3) Rating from Valens, Moderate Refinancing Need


  • Credit markets are grossly overstating X’s credit risk with a CDS of 615bps and cash bond YTW of 8.649%, relative to an Intrinsic CDS of 270bps and Intrinsic YTW of 4.659%. Furthermore, Moody’s is overstating the firm’s fundamental credit risk, with their highly speculative, high-yield B1 credit rating four notches lower than Valens’ XO (Baa3) credit rating
  • Fundamental analysis highlights that X’s cash flows plus excess cash should exceed all obligations including debt maturities in each year until 2025, when the firm faces a material $750mn debt headwall. However, the firm has ample capex flexibility to help service this shortfall, and boasts a robust 350% recovery rate, indicating they should be able to access credit markets to refinance, if necessary
  • Incentives Dictate Behavior™ analysis highlights that management is incentivized to improve all three value drivers: sales, margins, and asset utilization, which should drive Uniform ROA improvement and lead to increased cash flows available for servicing obligations going forward. Moreover, most management members are not well compensated in a change-in-control, indicating they are not incentivized to pursue a sale or accept a buyout of the firm, reducing event risk.
  • Earnings Call Forensics™ of the firm’s Q1 2019 earnings call (5/3) highlights that management is confident in their first quarter results and capital structure improvements. In addition, they are confident in the stability of their credit rating and their investment into making Mon Valley Works one of the world’s lowest-cost steel mills
  • X currently trades at a severe discount to UAFRS-based (Uniform) Assets, with a 0.3x Uniform P/B (V/A’). Given that valuations are likely being compressed by the market’s inaccurate perception of the firm’s credit risk, X could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement. Moreover, at current levels, equity downside is likely limited, as asset values begin to offer a floor to valuations at these levels.
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