Knife River will fund the spin-out — which includes a $825m distribution to MDU — with $425m of SUNs due 2031, a $350m revolving credit facility and a $300m five-year term loan A.

Lead left bank JP Morgan started price talk on the SUNs at 8%-8.25% on Monday, but by this morning the yield tightened to 7.75%-8% and the deal was upsized from its original $400m size. 

Investors said the higher end of that yield was particularly attractive when compared with similar notes in the space. 

For example, the proposed yield for Knife River is some 150bp over cement supplier Summit Materials’ $700m 5.25% SUNs due 2029, which last traded at a yield to maturity of around 6.5%. 

Summits’ notes are shorter-dated, but provide a fairly good comp because the two companies have identical Ba2/BB ratings. Moody’s described Knife River’s financial policies as conservative and noted its low leverage and good liquidity. 

The extra yield is probably warranted given Knife River’s unproven track record as a standalone entity, one HY analyst said. “It looks like a lower quality Summit Materials, but might be worth the yield pickup,” the analyst said. 

All about infra

The lower price talk might turn off some investors but the company’s potential upside will likely keep others on board (check out 9fin’s cap table and Credit QuickTake for more detail on the financials) 

Even if the yield shakes out at a less enticing level, there are reasons to like a construction materials business in the current market. The outlook for residential and commercial real estate construction might be darkening, but infrastructure projects offer growth potential.

Knife River’s relatively low leverage should give it a solid base to take advantage of increased road and highway construction projects in the coming years, which are expected as part of the Biden administration’s $1trn infrastructure bill. 

Specifically, the bill sets aside $110bn for surface transportation programs that will help repair America’s roads, highways and bridges. Such projects will require concrete and asphalt that Knife River already provides, to customers including several state departments of transportation in the Western US. 

That governmental spending should help weather what is expected to be a slowdown in residential building projects, especially in a recessionary environment, S&P wrote this week. 

“We expect Knife River's exposure to the aggregates segment will remain more resilient compared with those exposed to discretionary products and new home construction,” analysts wrote in the report. 

“We anticipate the company will see an overall lift from infrastructure project lettings in the latter half of 2023 but primarily in 2024.” 

MDU Resources and Knife River declined to comment and JPM did not respond to a request for comment.