Debt Prices Signal Stock Valuation Disconnects

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Capital Markets / Investor Relations in Two Minutes or Less
What Corporate Debt Prices Signal About Stock Prices
Corporate debt prices represent a significant indicator of the health of the corporation and underlying stock price.
Debt trading prices can signal to investors and executives alike that a significant valuation disconnect exists in the underlying stock.
If the debt trades near par or better, and the stock trades well below $10, a significant valuation disconnect worth researching likely exists.
Improving the features of the corporate debt stack become a major catalyst for resolving the valuation disconnect and unlocking shareholder value.
Transocean ($RIG) represents a current real- life example.
The Best Scenario
The optimal valuation disconnect scenario occurs when the corporate debt trades near par value or better and the underlying equity trades at a low price, say significantly below $10.
The Transocean Situation
Currently, $RIG faces this type of situation.
A highly levered company with $7B+ in debt.
The bonds trade near par value and the equity trades well below $10 per share.
The key debate in the stock holds that excess leverage ($7B+ in debt) makes Transocean insolvent.
However, current debt pricing and recent debt refinancing seem to suggest a significant valuation disconnect exists in the stock.
Debt Refinancing as a Catalyst
$RIG recently announced a major refinancing of its debt, which improves the company’s debt stack in several ways
1. Structure: moving from secured to unsecured debt
2. Duration: maturity moves from 2025/2027 to 2029/2031
3. Rate Improves: Nearly a 2% improvement at the midpoint
4. Sizing: the refinance started at $1.5B and was upsized to $1.8B
Insolvent companies are not able to refinance 40% of their market cap at attractive rates and terms!
Key Learnings
1. Debt prices signal a lot about stocks and significant valuation disconnects
2. Improving debt - structure, rates, duration, et al., represents a major catalyst to unlock value
3. Roll debt maturities when you can, before you are forced to at terms you do not like