James Hardie’s $3.5B Financing Raises Questions on Debt and Merger Risks

Robust Financing for a Strategic Merger

James Hardie Industries plc has announced the successful syndication of new senior secured credit facilities totaling $3.5 billion. This financing package is designed to underpin the company’s operations and the highly anticipated merger with The AZEK Company Inc. The syndication attracted broad support from 30 banks, reflecting strong market confidence in James Hardie’s strategic direction.

The credit facilities comprise a $1 billion revolving credit facility and $2.5 billion in term loans split into a $750 million three-year tranche and a $1.75 billion five-year tranche. These facilities offer James Hardie both flexibility and scale, enabling it to manage working capital needs and fund the merger’s cash consideration.

Interest Rate Strategy and Financial Terms

Interest rates on the term loans are linked to the Term SOFR benchmark, with margins ranging from 1.25% to 2.00% depending on the company’s leverage ratio. To mitigate interest rate volatility, James Hardie has entered into an interest rate swap fixing the three-month SOFR at 3.79% on $1 billion through mid-2028. This swap is expected to provide rate certainty and reduce overall interest expenses.

Importantly, the new credit facilities reduce prior bridge loan commitments from $4.3 billion to $1.7 billion, signaling a significant de-risking of the company’s financing structure ahead of the merger. The revolving credit facility also includes sublimits for letters of credit and swing line loans, enhancing operational flexibility.

Covenants, Collateral, and Amortization

The credit agreement includes customary covenants restricting additional indebtedness, liens, and certain corporate actions, ensuring disciplined financial management post-merger. The loans are secured by liens on equity interests of key U.S. subsidiaries, providing lenders with collateral protection.

The $1.75 billion five-year term loan will amortize quarterly, starting at 0.625% of the principal in the first two years and increasing to 1.25% thereafter, with the balance due at maturity. These structured repayments aim to balance cash flow management with debt reduction.

Strategic Implications and Market Confidence

Rachel Wilson, CFO of James Hardie, highlighted the strong investor support for the syndication, emphasizing the market’s confidence in the company’s growth strategy and value proposition. The financing package positions James Hardie to execute the merger with AZEK from a solid financial footing, while maintaining flexibility for ongoing corporate needs.

However, the merger’s completion remains subject to regulatory approvals and other customary conditions, which introduces some uncertainty. Investors will be watching closely how the combined entity manages leverage and integrates operations post-merger.