Moody’s upgrades Knife River’s rating, assigns Ba1 to proposed bank credit

Investing.com -- Moody’s (NYSE:MCO) Ratings has upgraded the corporate family rating (CFR) of Knife River Corporation (NYSE: KNF) to Ba1 from Ba2. The company’s probability of default rating (PDR) has also been upgraded to Ba1-PD from Ba2-PD. In addition, the rating on Knife River’s senior unsecured notes due 2031 has been raised to Ba2 from Ba3. A Ba1 rating has been assigned to Knife River’s proposed senior secured bank credit facilities.

The proposed credit facilities include a $500 million senior secured revolving credit facility due 2030, a $265 million senior secured term loan A due 2030, and a $500 million senior secured term loan B due 2032. The SGL-1 Speculative Grade Liquidity Rating of Knife River remains unchanged. Moody’s has changed the outlook for the company to stable from positive.

The upgrade is based on the expectation that Knife River will maintain solid credit metrics with leverage remaining below 2.5x adjusted debt-to-EBITDA. The company is expected to generate positive free cash flow, despite increased capital investments. Knife River plans to use the proceeds of the term loans to refinance its existing term loan A and to acquire Strata Corp for approximately $454 million. The remaining proceeds will be applied to cash on hand. Strata Corp is a provider of building materials and contracting services, and its acquisition will expand Knife River’s geographical presence in North Dakota and Minnesota.

Peter Doyle, a Moody’s Ratings VP-Senior Analyst, noted that Knife River has demonstrated its commitment to conservative financial policies since going public in mid-2023, with leverage consistently remaining below 2.5x debt-to-EBITDA.

Moody’s believes that Knife River’s Ba1 CFR reflects the company’s expected ongoing good operating performance, with an adjusted EBITDA margin sustained in the range of 16% - 17% through 2026. The rating is supported by favorable demand characteristics that support moderate growth in infrastructure investments and demand for building materials in the states where Knife River operates.

The Ba1 rating is constrained by the cyclicality of demand in the US construction industry, which is the primary driver of Knife River’s revenue. The company faces intense competition, which Moody’s believes makes significant expansion of operating margins and market share gains difficult to achieve.

Knife River’s liquidity is considered a credit strength. The company is expected to generate around $350 - $375 million in annual cash flow from operations over the next two years, sufficient to support its planned increase in capital expenditures. The company has cash on hand of approximately $280 million as of the end of 2024 and will have full access to a $500 million revolving credit facility due 2030.

The stable outlook is based on the expectation that Knife River will continue to perform well, generating good margins that will support a gradual deleveraging through 2026. The company has no material near-term debt maturities and adheres to conservative financial policies.

The Ba1 rating on Knife River’s senior secured bank credit facility, which is the same as the corporate family rating, results from its position as the majority of debt in the company’s capital structure. The Ba2 rating on Knife River’s senior unsecured notes due 2031, one notch below the corporate family rating, is due to their subordination to the company’s secured debt.

A ratings upgrade could occur if end markets remain supportive of organic growth such that adjusted debt-to-EBITDA is sustained around 2x. A ratings downgrade could occur if adjusted debt-to-EBITDA is sustained above 2.5x or operating performance erodes on a sustained basis.

Knife River, headquartered in Bismarck, North Dakota, is an integrated supplier of aggregates and provides construction contracting services. The company also manufactures asphalt and ready-mix concrete. Knife River’s revenue for the 12 months ending September 30, 2024, was $2.9 billion.

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