Investing.com -- Moody’s Ratings has placed the ratings of The AZEK Group LLC (AZEK) on review for an upgrade. This follows the announcement that James Hardie (NYSE: JHX ) Industries plc (James Hardie) will acquire the company. The ratings under review include AZEK’s Ba2 corporate family rating, Ba2-PD probability of default rating, and Ba2 ratings on its first lien senior secured term loan and revolving bank credit facilities.

James Hardie announced on March 23, 2025, that it has entered a definitive agreement to acquire AZEK for $8.75 billion. This includes AZEK’s net debt of $386 million. AZEK’s shareholders are set to receive $26.45 in cash and 1.034 shares of James Hardie for each share of AZEK stock. The transaction is expected to close in the second half of 2025, pending approval from AZEK’s shareholders, regulatory approvals, and the satisfaction of customary closing conditions.

The merger of the two companies will increase James Hardie’s revenue scale to approximately $5.4 billion. It will also enhance the company’s pro forma EBITDA margin to 27% on Moody’s adjusted basis. The business combination will provide a strong offering of complementary exterior building products. It will also expand James Hardie’s addressable markets and enhance the company’s cash flow generation. Both companies share a focus on material conversion in their business strategies.

The review for upgrade reflects governance considerations related to the change in AZEK’s ownership structure. It also takes into account James Hardie’s stronger credit profile and its larger scale. The review will focus on the completion of the transaction, the combined entity’s future capital structure, and whether AZEK’s debt will be fully repaid at closing. This is in line with the change of control provision in the credit agreement. Moody’s will also consider whether AZEK’s debt remains outstanding and the adequacy of financial and operational disclosures available.

AZEK’s existing Ba2 CFR is supported by several factors. These include the company’s leading position in the market for low maintenance building products, its reliance on the residential repair and remodeling end market for the majority of its revenue, and the conversion trend from traditional material such as wood to engineered low maintenance product. The company’s conservative financial strategies, solid operating margins, and very good liquidity are also taken into account.

The existing credit profile is constrained by factors such as the company’s exposure to the cyclicality of its residential new construction and repair and remodeling as well as commercial end markets. Other considerations include the competitive dynamics in the low maintenance building products segment, sensitivity of operating margin, cash flow and liquidity to changes in raw material costs, and risks related to the company’s acquisition activity.

The ratings could be upgraded if AZEK expands its size and scale and maintains conservative financial strategies. Debt to EBITDA sustained below 2.0x and EBITA to interest coverage above 7.0x, along with strong operating margins and robust liquidity, could result in an upgrade.

While a ratings downgrade is unlikely given the current review, it could occur if the company experiences a sustained decline in revenue and operating margins, or if its financial strategies grow aggressive with respect to shareholder friendly actions or acquisitions. An increase in leverage toward 3.0x, a reduction in interest coverage below 5.0x, or a deterioration in liquidity could result in a ratings downgrade.

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