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X – Traded CDS 709bps, Base Case iCDS 223bps, Negative Case iCDS 373bps, 2029 6.875% Bond YTW of 9.266%, iYTW of 5.184%, Ba3 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

July 20, 2022

  • Credit markets are grossly overstating X’s credit risk with a cash bond YTW of 9.266% and a CDS of 709bps, relative to an Intrinsic YTW of 5.184% and an Intrinsic CDS of 223bps. Meanwhile, Moody’s is materially overstating the firm’s fundamental credit risk, with its highly speculative Ba3 credit rating five notches below Valens’ IG4+ (Baa1) credit rating.

  • Incentives Dictate Behavior™ analysis highlights mixed signals for credit holders. X’s compensation framework incentivizes management 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.

  • Earnings Call Forensics™ of the firm’s Q1 2022 earnings call (4/29) highlights that management generated an excitement marker when saying fixed cost for ore and coal, combined with higher demand and spot prices, should contribute to meaningful EBTIDA improvement. In addition, they are confident they have diversified their iron and ore sources, and that their infrastructure strategy is increasing their strength domestically.

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