Brad Jacobs' latest venture, QXO, has its first debt rating. (Photo: Jim Allen\FreightWaves)

In its first public debt rating since its formation, Brad Jacobs’ building supply rollup QXO has earned equivalent grades from Moody’s and S&P Global Ratings, but neither is in investment-grade territory.

In the past several days, S&P Global gave QXO a BB- rating. Moody’s assigned a Ba3 rating to the company. The two grades are considered equivalent on their respective scales, three notches below the dividing line for investment-grade and non-investment-grade debt.

The ratings came as QXO (NYSE: QXO) is making its first acquisition, Beacon Roofing Supply (NASDAQ: BECN), since Jacobs created QXO by buying a small, publicly traded software company in late 2023 and converting that to a New York Stock Exchange-listed operation ready to take the fragmented building supply ecosystem and create a giant. The promise of higher returns generated in part by more efficient logistics was always at the heart of Jacobs’ plans, as he had done in the creation of XPO (NYSE: XPO).

The Beacon deal is expected to close in the coming weeks.

The debt ratings from the agencies come as QXO has upsized a recent debt offering whose proceeds are to be used to complete the approximately $11 billion acquisition of Beacon Roofing.

The debt offering covers only a portion of the acquisition. The bond offering was successful enough that QXO announced Wednesday that it was increasing its size to $2.25 billion from $2 billion for the senior secured notes due in 2032, carrying an interest rate of 6.75%. Other borrowings, balance sheet cash and proceeds from earlier equity offerings will fill the difference to complete the Beacon purchase.

With QXO having no other operating assets except the software company, which is tiny compared to Beacon, the S&P report focused on the roofing supplier, since QXO will essentially be almost 100% Beacon after the acquisition, at least until it makes its next purchase.

S&P said “profitability and leverage” will be preserved by “maintaining margins and financial discipline around excess cash.” Beacon’s margins have been “notably stable” around 11% to 12%. But the agency also noted that Beacon traditionally has had lower margins than its peers because of its “more aggressive branch expansion strategy.”

However, becoming part of QXO should result in a “shift in the company’s strategy toward prioritizing efficiency and optimization gains to enhance profitability, resulting in annual margin improvements of nearly 100 basis points,” S&P said. That excess cash is expected to be used internally for investments and debt reduction, rather than “inorganic growth opportunities,” a vague reference that suggests acquisitions would be financed by tools other than QXO’s cash flow.

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“The company has a well-entrenched distribution network and strong supplier relationships that offset its limited product focus and end market exposure,” S&P wrote about Beacon. “With over 20% market share in the North America roofing distribution industry, QXO serves both residential and commercial roofing across a wide footprint.”

The finances of Beacon Roofing are well known, unlike those of private companies. But private companies with publicly traded and rated debt do have a window into their operations through the ratings agencies, which can provide insight into their finances that would not otherwise be known.

Beacon had net sales of $9.7 billion last year and about $9.2 billion in 2023.

The ratings agencies are primarily focused on debt coverage. S&P said it expects leverage at QXO to be about 5.3X this year, but with cash being deployed to reduce debt, it expects that number to be about 4X in 2026.

Moody’s sees a less aggressive debt paydown than S&P Global, with leverage of 4.7X by the end of 2026.

The  outlook on QXO debt at both agencies is stable, meaning an upgrade or downgrade in the near to medium term is not likely.

QXO declined to comment on the ratings agencies’ actions.

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