Building products manufacturer Quikrete Holdings is seeking to issue US$9.2bn of loans and bonds this week in what will be the biggest M&A trade in leveraged finance so far this year.
The financing package, which will fund the US$11.5bn acquisition of Summit Materials, comprises a US$3bn term loan, a US$3.95bn seven-year secured bond and a US$2.25bn unsecured eight-year unsecured note. Bond tranches, rated Ba3/BB and B2, respectively, are both callable in year three.
Left lead Wells Fargo has set initial price thoughts of high 6% area on the secured tranche, while the unsecured bond is expected to come 50bp-75bp over pricing on the shorter-dated note.
The seven-year loan, meanwhile, is being talked at SOFR plus 250bp-275bp.
The borrower is expected to have little trouble selling its debt among investors keen to get their hands on new money assets as opposed to the refinancings and repricings that have dominated issuance over the past year.
Indications of interest on the bonds alone reached US$13bn last week, according to a portfolio manager in contact with the leads.
"Our market is very starved for paper," said the investor. "They are not going to have any problems getting it done."
Demand for the deal has also been supported by the relatively benign financing structure.
"It is a pretty down the fairway M&A deal with no risky sponsor shenanigans," he said. "Leverage is manageable and free cash flow should be pretty robust."
The two business complement each other as Summit's cement and ready-mix concrete can supply Quikrete with the input materials for the cement-based products it sells, said S&P earlier this month.
"It is a lot more than just bags of concrete mix," said the investor. "They have a ton of infrastructure products, concrete that goes into the big highway and other government infrastructure projects, which we think is pretty attractive."
Even so, while Quikrete has been acquisitive in the past, Summit marks its largest purchase to date, prompting concern among the rating agencies.
On Friday, Moody's downgraded Quikrete to Ba3 from Ba2, citing an increase in leverage and the execution risks involved in integrating with Summit, which has 7,000 employees and acquired Argos USA just a year ago.
The rating agency estimates that the company's debt-to-Ebitda ratio will increase to around 5x from 2.4x as of September 30, 2024.
Yet while S&P recently placed a negative outlook on its BB rating due to higher leverage, over the next few years it expects Quikrete to generate up to US$1.5bn in positive free cash flow that would help it to deleverage.
"Free cash flow should be pretty robust and they are saying the right things in terms of wanting to deleverage the balance sheet and to go back to 3x or 4x leverage," said the investor.