X Valens Credit Analysis – CDS 240bps, Base Case iCDS 103bps, Negative Case iCDS 191bps, 2025 6.875% Bond YTW of 6.508%, iYTW of 3.918%, B1 Rating from Moody’s, IG3+ (equivalent to A1) Rating from Valens, Low Refinancing Need

• CDS markets are overstating X’s credit risk with a CDS of 240bps relative to an Intrinsic CDS of 103bps, while cash bond markets are grossly overstating credit risk with a YTW of 6.508% relative to an Intrinsic YTW of 3.918%. Furthermore, Moody’s is grossly overstating the firm’s fundamental credit risk, with their highly speculative, high-yield B1 credit rating nine notches lower than Valens’ IG3+ (A1) credit rating
• Fundamental analysis highlights that X’s cash flows alone would exceed all obligations including debt maturities in each year through 2024. Additionally, X boasts a robust 343% recovery rate on unsecured debt, which should facilitate access to credit markets should they need to refinance
• Incentives Dictate Behavior™ analysis highlights that management is likely to be focused on improving all three value drivers for the company: sales, margins, and asset utilization. This should drive Uniform ROA improvement and lead to increased cash flows available for servicing obligations going forward. Also, management members own material amounts of X equity relative to their average annual compensation, indicating that they are likely well-aligned with shareholders for long-term value creation
• X currently trades at valuations well below UAFRS-based (Uniform) Assets, with a 0.5x Uniform P/B (V/A’). At these levels, the market is pricing in expectations for Uniform ROA to remain muted at current 2%-3% levels through 2022, accompanied by 1% Uniform Asset shrinkage going forward. 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