X – Traded CDS 476bps, Base Case iCDS 201bps, Negative Case iCDS 511bps, 2029 6.875% Bond YTW of 7.670%, iYTW of 5.453%, Ba3 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need
May 26, 2023
- Credit markets are materially overstating X’s credit risk with a YTW of 7.670% relative to an Intrinsic YTW of 5.453%, while CDS markets are grossly overstating X’s credit risk with a CDS of 476bps relative to an Intrinsic CDS of 201bps. Meanwhile, Moody’s is materially overstating the firm’s fundamental credit risk, with its speculative Ba3 credit rating five notches below Valens’ IG4+ (Baa1) credit rating.
- Incentive Dictate Behavior™ analysis highlights mostly positive signals for credit holders. Management’s compensation metrics should drive them to focus on all three value drivers: asset efficiency, margin expansion, and growth, which should lead to Uniform ROA expansion and increased cash flows to service debt obligations. In addition, CEO Burritt is a material holder of X’s equity, indicating he is well-aligned with shareholders for long-term value creation.
- Earnings Call Forensics™ of the firm’s Q1 2023 earnings call (4/28) highlights that management is confident they are delivering on their transformative strategic projects, they remain on track and on budget with transformation initiatives, and are benefiting from strong trade enforcement by the U.S. government. In addition, they are confident they can position their mini mill segment to produce over $1 billion of annual through cycle free cash flow by 2026, that their extremely low leverage provides flexibility, and that their tubular segment continues to see strong demand. That said, management sentiment was negative when talking about their demand outlook, growth opportunities, and legislation. Management may be overstating the sustainability of their current sales volume and customer interest, given extended lead times. Additionally, management may be overstating the potential of the launch of the new Electrical Steel Index to strengthen their strategic partnerships and the power of innovation at their Gary Works and Big River 2 sites. Lastly, management may be concerned about an independent auditable framework around ESG steelmaking.
