X - Valens Credit Report - 2019 06 14
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 Behaviorâ„¢ 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 Forensicsâ„¢ 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.
United States Steel is a steel producer of flat-rolled and tubular products with production operations in the United States and Europe. The company is also engaged in railroad services and real estate operations. The company's segments are: North American Flat-Rolled, which produces slabs, strip mill plates, sheets and tin mill products; U. S. Steel Europe, which produces and sells slabs, strip mill plate, sheet, tin mill products and spiral welded pipe, as well as heating radiators and refractory ceramic materials; and Tubular Products, which produces and sells electric resistance welded steel casing and tubing (known as oil country tubular goods), and standard and line pipe and mechanical tubing.
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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