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William Hoffman

On a Monday bondholder call, executives at Clayton, Dubilier & Rice-backed Cornerstone Building Brands said the US housing market would soon be coming out of a so-called trough and expressed confidence that conditions would improve as soon as interest rates come back down.

Cornerstone, which manufactures siding, windows, doors, roofing and other exterior building products, also pitched itself as a beneficiary of opportunities to repair aging housing, in addition to commercial infrastructure.

Then on Wednesday the company priced new $500m SSNs due 2029 at 9.5%, to pay ABL borrowings tied to the acquisition of Mueller Supply Company. (Check out our Credit QuickTake on the deal on the 9fin platform.)

Cornerstone is one of several building products companies that has been selling debt investors on the promise of interest rate cuts in September and opportunities in other end-markets in order to raise money.

Back in 2022, we reported that lenders were souring on businesses tied to building products as rising interest rates dampened demand for housing and slowed down renovation activity. But the situation is more nuanced than that, and while it is true that elevated rates may have negatively impacted demand and supply in some areas of the housing market (these charts break down the quirks of the current housing market), it has also opened up pockets of opportunities in other areas. As such, investor sentiment towards the sector has turned.

“There’s two parts to the total housing market — new residential and existing home sales, the latter of which drive repair and remodeling demand,” said Joseph Pandolfo, a managing director in Deutsche Bank’s leveraged finance team. “Existing home sales have been extremely slow due to interest rates, which has led to a lack of inventory as there is limited upside for homeowners to move — more than 60% of mortgages outstanding have an interest rate below 4%. New residential sales have picked up some of the slack.”

Deutsche Bank was also the lead bank on several deals tied to building product companies over the last two weeks. Proceeds ranged from paying off acquisition-related borrowings to tackling existing debt. These include a $600m incremental TLB due 2029 from White Cap Supply Holdings, as well as $500m of senior unsecured notes from Standard Building Solutions.

The possibility of an interest rate cut in September may have also helped issuers to attract prospective lenders to the table.

“If you’re a building products company and think there’s going to be any sort of rate reduction, this is a good time to kind of get ahead of it and do a deal with a forecast of the second half of the year being strong,” said a portfolio manager.

But not all issuers had a smooth sailing time in the leveraged finance primary market — For example, a $1.5bn debt offering for Wilsonart also led by Deutsche Bank last week crossed the finish line only after pricing was moved wide of talk and the covenants were tightened.

The financing consisted of $500m of senior unsecured notes and a $1.06bn TLB due 2031 to refinance Wilsonart’s existing debt. It also funds CD&R’s purchase of ITW’s remaining stake in the company. Wilsonart makes surfaces for countertops, work surfaces, furniture, wall panels, and cabinets. (See our Credit QuickTake of the deal on the 9fin platform.)

“The terms were kind of aggressive and the underlying industry data given by the company wasn’t super supportive of some of their end-markets,” said a buysider following the deal. “That said, it could be viewed as a pretty good business if you pick it up at the right point of the cycle.”

Borrowers that sell into end-markets besides housing are hyping other favorable tailwinds in order to attract investors.

“Parts of the commercial sector outside of offices have been performing reasonably well. Demand for infrastructure, data centers, education and healthcare facilities is really strong. Hospitality is also doing well and demand there is expected to pick up a bit in the future,” Pandolfo said.

White Cap, also a CD&R portfolio company, said on a Monday lender call that the residential market only represents around 20% of the company’s business, and that its scale and diversified supplier base has enabled the company to serve “practically all trades” in each phase of the life cycle across both the non-residential and residential markets. The company supplies power tools and specialty construction materials in the US and Canada.

White Cap’s $600m TLB, which will be used to repay ABL borrowings used to fund a buyout of The Sterling Group’s existing equity investment, priced at SOFR+325bps with a 99.5 OID on Thursday.

And even though existing home sales have been extremely slow, there is still steady demand for repairs and remodels.

Management for Standard Building Solutions, which manufactures roofing and related products, said on a Tuesday call said that demand for its products is stable through the economic cycle, with 75% of demand being driven by repair and remodeled living needs.

The company’s senior secured notes offering, which was used to repay $500m of the existing TLB due 2029, priced at par with a 6.5% coupon the same day Tuesday. (Check out our Credit QuickTake on the transaction on the 9fin platform here.)

That seems enough to satisfy some investors for now.

“If you need a new roof, you need a new roof,” said a second portfolio manager. “You can't put it off just because you're in a recession.”

Representatives for Wilsonart, Cornerstone, Standard Building Solutions and CD&R did not return a request for comment. White Cap declined to comment.

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