Investing.com -- Moody’s Ratings has revised the outlook for James Hardie (NYSE: JHX ) International Finance Designated Activity Company from positive to stable, following the company’s acquisition of The AZEK Company Inc. Concurrently, Moody’s has affirmed James Hardie’s Ba1 corporate family rating, Ba1-PD probability of default rating, and Ba1 ratings on its senior unsecured notes. The company’s Speculative Grade Liquidity Rating of SGL-1 remains the same.

On March 23, 2025, James Hardie announced a definitive agreement to acquire AZEK for $8.75 billion, which includes $386 million of net debt. The transaction will be financed through a mix of new debt and equity that James Hardie plans to issue. The company has also secured an unsecured bridge facility for the deal. AZEK’s shareholders will receive $26.45 in cash and 1.034 shares of James Hardie for each share of AZEK stock. After the deal is finalized, James Hardie’s and AZEK’s shareholders will own 74% and 26% of the merged company, respectively. The transaction is expected to close in the second half of 2025, pending AZEK’s shareholders’ approval, regulatory approvals, and customary closing conditions.

The affirmation of the Ba1 ratings is a reflection of the positive impact the acquisition will have. The merger with AZEK will increase James Hardie’s revenue to approximately $5.4 billion and result in a strong pro forma EBITDA margin of 27% (on Moody’s adjusted basis). The merger will result in a strong offering of exterior building products, expand James Hardie’s addressable markets, and further enhance the company’s robust cash flow generation.

The change in outlook to stable is due to the additional leverage James Hardie will incur from the acquisition and the time it will take to reduce its long term operating target of below 2.0x net debt to EBITDA from around 2.8x reported pro forma net debt to EBITDA at closing. Total debt to EBITDA will increase to around 3.3x after the transaction, given the estimated $4.0 billion of new debt. The leverage is expected to decline to 2.5x-3.0x within two years from the closing of the transaction.

James Hardie’s Ba1 CFR is underpinned by the company’s established industry expertise, strong market position in the fiber cement product category, and a growth-oriented operating strategy. The company’s revenue scale of $3.9 billion on a standalone basis, global presence across four continents, and the scale of the combined entity also support the rating. Other supporting factors include conservative financial policies, a history of strong operating margins, and robust cash flow from operations.

However, the company’s credit profile is limited by its appetite for acquisitions, high level of capital expenditures, risks related to shareholder-friendly returns, exposure to an asbestos liability, and the cyclicality of residential new construction and repair & remodeling end markets.

Moody’s has changed James Hardie’s governance profile score to G-3 from G-2 and its credit impact score to CIS-3 from CIS-2. This change reflects the company’s financial policy that includes a willingness to pursue a transformative acquisition and incur a substantial amount of debt and leverage associated with it.

The ratings could be upgraded if the company maintains conservative financial policies, sustains leverage below 2.0x during various industry cycles, and continues to expand scale. Conversely, the ratings could be downgraded if the company changes its financial policy to be more shareholder friendly or is expected to sustain debt to EBITDA leverage above 3.0x.

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