SVU - Valens Credit Report - 2018 02 20
- CDS markets are materially overstating credit risk with a CDS of 692bps relative to an Intrinsic CDS of 479bps, while cash bond markets are overstating credit risk with a cash bond YTW of 8.460% relative to an Intrinsic YTW of 7.440%. Additionally, Moody's is overstating SVU's fundamental credit risk, viewing the firm as a highly speculative, high-yield B1 credit, four notches lower than Valens' XO (Baa3) credit rating - Incentives Dictate Behavior™ analysis indicates that SVU's management compensation framework is positive for credit holders as it aligns management to concentrate on drivers of Uniform ROA expansion, which should lead to higher cash flows available for servicing obligations going forward. Additionally, management members are not well compensated in a change-in-control, limiting event risk for creditors - SVU currently trades near historical lows, with a 0.9x UAFRS-based (Uniform) P/B. At these levels, the market is pricing in expectations for Uniform ROA to fall to 5%, with 2% Uniform Asset growth going forward. Given that valuations are likely being compressed by the market's inaccurate perception of the firm's credit risk, SVU 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
Supervalu is a distributer of grocery and other products and provision of logistics and professional service solutions to retailers across the U.S. The company's business is classified into two reportable segments: Wholesale, which provides wholesale customers a variety of food and non-food products, including national and regional brands, and the company owns lines of private label products, as well as providing an array of professional services that provide wholesale customers with solutions; and Retail, which provides grocery offering and, depending on size, a variety of additional products, including general merchandise, home, health and beauty care, and pharmacy.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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