Fitch Rates Toys ‘R’ Us New Term Loan, Says Outlook Stable
Fitch Ratings has assigned a rating of B-/RR5 to the $300 million term loan due 2018 (Term B-3 loan, co-terminus with Term B-2 loan) issued at Toys ‘R’ Us – Delaware, Inc. The $300 million term loan (issued under the remaining accordion feature available under its senior secured term loan credit facility) is secured by a first lien on intellectual property rights and a second lien on accounts receivable and inventory of Toys-Delaware and its domestic subsidiaries. The $300 million term loan issuance is the first in a series of refinancings needed to address the upcoming $1.3 billion maturities in early 2013 at various Toys ‘R’ Us entities. The Rating Outlook is stable.
The 2013 maturities primarily include $400 million of unsecured notes at Toys ‘R’ Us, Inc. (HoldCo) maturing April 2013 and $891 million in various European real estate facilities between February and April 2013. (Toys has $60 million of unsecured loans amortizing at its Toys ‘R’ Us – Japan entity in 2012.) Given weak free cash-flow (FCF) generation in 2011, Fitch expects Toys will need to address the 2013 maturities primarily through refinancing. The debt could be financed by a combination of issuing HoldCo notes and by European real estate facilities under the existing structure or under a structure similar to the U.S. PropCos (which would consolidate assets in the UK, France and Spain). Given the still unfavorable conditions in the European CMBS markets, Fitch believes the amount issued either at the various European entities or at the combined level will be materially less than the $900 million currently outstanding, creating the need to issue debt at the HoldCo level. The failure to address these maturities over the next three to six months is likely to lead to downward pressure on the company’s ratings.
Toys ‘R’ Us (Toys) has reported negative domestic comparable store sales (comps) and continued weakness in its international segment (40% of revenue and profit before corporate allocation) in 2011. As a result of weak top-line performance, 2011 EBITDA of $1.03 billion was modestly lower by approximately 5% than was reported in 2010, although still in line with Fitch’s expectation.
Leverage (adjusted debt/EBITDAR) came in at 6.2 times (x) as of Jan. 28, 2012 and could potentially creep up to the mid-6.0x range in 2012 and 2013. Coverage (operating EBITDAR/gross interest expense plus rents) is expected to be in the range of 1.4x-1.5x. This assumes a 2%-3% decline in comps at both the domestic and international segments, and flat to modest improvement in gross margin. Fitch expects continued deleveraging of selling, general, and administrative expenses.
FCF at negative $60 million at the end of 2011 was disappointing against Fitch’s expectation of positive $300 million, and was the result of the continued challenge of managing working capital efficiently. Fitch expects Toys to generate annual FCF in the $100 million range over the next two years, driven partly by working capital contribution compared to a significant use of cash in 2011 and 2010, on both timing related issues as well as excess inventory at the end of the holiday season.
Assuming the successful refinancing of upcoming maturities, Toys has adequate liquidity with $700 million of cash and cash equivalents and $1.3 billion of availability under its various revolvers as of Jan. 28, 2012.
The ratings continue to reflect Toys’ relatively stable share of the domestic and global toy industry. While Toys is the only remaining national brick-and-mortar specialty toy retailer in the U.S., it has muddled along against the increasing competition from discounters and online retailers for the more commodity-type toy products.