How will the issuance of $1.25 billion senior notes affect Millrose’s leverage and credit metrics?
Answer
The $1.25 billion senior‑note issuance will add a sizable amount of interest‑bearing debt to Millrose Properties, Inc.’s balance sheet. Even though the company has not disclosed the exact pre‑offering capital‑structure figures, the mechanics of the transaction can be broken down into the key credit‑metric groups that analysts and rating agencies monitor most closely:
| Credit‑metric group | What changes with the new notes | Why it matters |
|---|---|---|
| Leverage (gross) | Total debt rises by $1.25 bn (plus any accrued interest that will be capitalised at closing). The Debt‑to‑EBITDA ratio therefore moves upward unless the proceeds are used to generate proportionally higher EBITDA. | A higher gross‑leverage ratio signals a larger “fixed‑cost” burden and can push the company toward the upper end of the rating agency’s leverage “band” for its rating tier. |
| Net leverage | Net debt (gross debt less cash & cash‑equivalents) also climbs by roughly $1.25 bn, unless the cash raised is immediately deployed to offset other liabilities. Net‑Debt‑to‑EBITDA therefore increases. | Net‑leverage is the metric most rating agencies use to gauge “true” indebtedness after accounting for liquidity. A jump can tighten the company’s covenant buffers. |
| Interest‑coverage | The new notes carry a 6.375 % coupon. Annual interest expense on the full $1.25 bn is ≈ $79.7 million (6.375 % × $1.25 bn). If EBITDA stays flat, the EBITDA‑to‑Interest‑Expense (or EBIT‑to‑Interest‑Expense*) ratio falls. | A lower coverage ratio raises concerns about the ability to service debt from operating cash‑flows, which is a primary trigger for rating downgrades. |
| Liquidity & cash‑flow | The offering is priced at 100.00 % of principal plus accrued interest, meaning Millrose receives the full $1.25 bn in cash (subject to closing costs). This bolsters cash‑on‑hand and can be used to: • Re‑finance higher‑cost existing debt • Fund growth‑or‑development projects with higher returns • Replenish liquidity for covenant compliance. |
If the proceeds are applied to reduce higher‑cost debt or to invest in assets that lift EBITDA, the net‑leverage and coverage ratios may be partially offset. Conversely, if the cash is held or used for low‑return acquisitions, the ratios will stay elevated. |
| Credit‑rating outlook | Rating agencies (S&P, Moody’s, Fitch) typically map a company’s Leverage‑Band and Coverage‑Band to a rating range. Adding $1.25 bn will likely push Millrose deeper into the “high‑leverage” and “low‑coverage” zones of its current rating tier. The net effect could be: • Stable rating if the company can demonstrate that the proceeds will materially improve earnings or reduce higher‑cost debt. • Negative outlook or downgrade if the leverage jump is not offset by earnings growth or if covenant ratios fall below agency‑defined thresholds. |
The rating impact is not automatic; agencies will weigh the use‑of‑proceeds, the company’s historical covenant compliance, and the quality of the underlying asset portfolio. A well‑articulated plan to redeploy the cash into higher‑margin properties can mitigate rating pressure. |
1. Quantitative Illustration (illustrative assumptions)
| Assumption | Value |
|---|---|
| Pre‑offering total debt (incl. existing senior notes) | $3.0 bn |
| Pre‑offering cash & equivalents | $0.5 bn |
| Pre‑offering EBITDA (12‑month trailing) | $800 million |
| Existing interest expense (annual) | $150 million |
| New senior‑note coupon | 6.375 % |
| Proceeds from new notes | $1.25 bn (no net‑issuance costs shown) |
| Metric (pre‑offering) | Metric (post‑offering) |
|---|---|
| Gross Debt‑to‑EBITDA | 3.0 bn / 0.8 bn = 3.75× |
| Net Debt‑to‑EBITDA | (3.0 bn – 0.5 bn) / 0.8 bn = 3.13× |
| Interest expense | $150 M |
| EBITDA‑to‑Interest | 0.8 bn / 150 M = 5.33× |
After issuance (no use‑of‑proceeds applied):
| Metric (post‑offering) | Calculation |
|---|---|
| Gross Debt | 3.0 bn + 1.25 bn = 4.25 bn |
| Gross Debt‑to‑EBITDA | 4.25 bn / 0.8 bn = 5.31× |
| Net Debt | (4.25 bn – 0.5 bn) = 3.75 bn |
| Net Debt‑to‑EBITDA | 3.75 bn / 0.8 bn = 4.69× |
| New interest expense | 150 M + 79.7 M ≈ 229.7 M |
| EBITDA‑to‑Interest | 0.8 bn / 229.7 M ≈ 3.48× |
Result: Gross leverage jumps from ~3.8× to ~5.3×, net leverage from ~3.1× to ~4.7×, and interest‑coverage falls from ~5.3× to ~3.5× – a material deterioration in the key credit metrics.
2. How the Impact Can Be Moderated
| Potential use of proceeds | Effect on credit metrics |
|---|---|
| Pay‑down of higher‑cost existing debt (e.g., 7‑8 % term loans) | Reduces overall gross debt, partially offsets the $1.25 bn addition; improves net‑leverage and may keep the leverage band stable. |
| Acquisition of high‑yield properties (EBITDA margin > 12 %) | Boosts future EBITDA, which dilutes the leverage ratios over time; improves coverage ratios as earnings rise. |
| Capital‑expenditure to upgrade existing assets | Enhances rent‑rolls and operating income, again lifting EBITDA and mitigating leverage. |
| Liquidity reserve (no immediate deployment) | Increases cash, which reduces net‑debt; however, if cash sits idle, the leverage ratios still look high until earnings catch up. |
A transparent “use‑of‑proceeds” disclosure—e.g., “$800 M will be used to refinance existing senior debt, $300 M to fund acquisition of Class‑A office assets with expected 13 % EBITDA margin”—helps rating agencies model a net‑neutral or even net‑improving impact on leverage.
3. Credit‑rating agency perspective
| Agency | Typical leverage band for a “BBB‑” rating (example) | What the $1.25 bn issuance could mean |
|---|---|---|
| S&P | Low‑BBB: Net‑Debt/EBITDA ≤ 3.0×; Mid‑BBB: 3.0‑4.0×; High‑BBB: 4.0‑5.0× | If Millrose was previously in the mid‑BBB band (≈ 3.5× net‑leverage) the post‑issuance level of ≈ 4.7× would push it into the high‑BBB band, prompting a negative outlook unless offset by earnings growth. |
| Moody’s | B2: Net‑Debt/EBITDA ≤ 3.5×; B1: 3.5‑4.5×; Ba2: 4.5‑5.5× | A move from B2 to Ba2 would be a rating downgrade unless the company can demonstrate a strong earnings trajectory. |
| Fitch | BBB‑: Net‑Debt/EBITDA ≤ 4.0×; BB+: 4.0‑5.0× | Crossing the 4.0× threshold would place Millrose in the non‑investment‑grade “BB+” band, a clear trigger for a downgrade. |
Note: The exact band thresholds differ by sector and by the agency’s internal models, but the direction of impact is consistent across agencies: higher leverage → lower rating unless earnings or cash‑flow improvements offset the debt increase.
4. Bottom‑line Takeaways
Immediate effect: The $1.25 bn senior‑note issuance will raise both gross and net leverage and lower interest‑coverage in the short term, because the added debt is sizable relative to Millrose’s current EBITDA base.
Rating risk: If the company remains in the same leverage band after the issuance, rating agencies may downgrade Millrose or place a negative outlook on the existing rating. The risk is amplified if the company’s covenant ratios (e.g., Net‑Debt/EBITDA ≤ 3.5×, EBITDA/Interest ≥ 3.0×) are already close to their limits.
3 Mitigation hinges on the use of proceeds:
- Debt refinancing (paying off higher‑cost debt) can blunt the net‑leverage rise.
- Deploying cash into high‑margin assets or development projects can lift future EBITDA, restoring coverage and leverage ratios over a 12‑ to 24‑month horizon.
- Maintaining a robust liquidity buffer (e.g., holding a portion of the proceeds as cash) improves net‑debt and may keep covenant ratios within agency‑defined “comfort zones.”
- Strategic communication: A clear, detailed “use‑of‑proceeds” plan—especially one that shows EBITDA‑uplift or debt‑reduction—will be critical for investors and rating agencies to assess the net credit‑impact and to avoid an automatic downgrade.
5. Suggested next steps for Millrose’s management
| Action | Rationale |
|---|---|
| Publish a detailed use‑of‑proceeds schedule (e.g., 60 % to refinance existing senior debt, 30 % to acquire Class‑A office assets, 10 % to liquidity reserve). | Allows analysts to model the net effect on leverage and interest‑coverage and reduces rating‑downgrade uncertainty. |
| Re‑run covenant calculations assuming the new interest expense and the projected EBITDA uplift from the planned acquisitions. | Demonstrates whether the company will remain in compliance with existing covenants or whether a covenant amendment is needed. |
| Engage rating agencies early (pre‑closing) to discuss the expected leverage band shift and the mitigating actions (refinancing, asset‑level upgrades). | Proactive dialogue can lead to a rating outlook adjustment rather than a surprise downgrade after the notes close. |
| Consider partial use of proceeds for early repayment of higher‑cost debt to keep the net‑leverage ratio closer to its pre‑offering level. | Directly reduces the gross debt impact and improves the coverage ratio. |
| Model a “post‑issuance EBITDA growth scenario” (e.g., 10‑15 % incremental EBITDA from new acquisitions) and share the results with investors. | Shows that the long‑term credit profile may improve, offsetting the short‑term leverage increase. |
Conclusion
The $1.25 billion senior‑note issuance will increase Millrose’s leverage and compress its interest‑coverage in the near term, moving the company into a higher‑risk band for its credit rating. The net credit‑impact will be determined by how the proceeds are deployed:
- If used to refinance higher‑cost debt and fund high‑margin growth, the leverage ratios may stabilize or even improve over time, limiting rating pressure.
- If the cash is held or spent on lower‑return projects, the elevated leverage and weaker coverage will likely trigger a downgrade or a negative outlook.
Management’s ability to articulate and execute a disciplined use‑of‑proceeds plan—and to communicate that plan transparently to rating agencies and investors—will be the key factor in whether the issuance is viewed as a strategic capital‑raising move or as a credit‑deterioration event.