Toys ‘R’ Us Bond Swap Pays 12% to Buy Time for a Turnaround

  • Retailer will trade its 2017, 2018 bonds for new 2021 issues
  • The company needs cash to battle Wal-Mart, Target and Amazon

Toys “R” Us Inc., beset by rivals and burdened by debt tied to its 2005 leveraged buyout, pushed ahead with a bond swap offering a 12 percent interest rate that could buy time for the retailer’s turnaround plan.

Holders can exchange outstanding notes due in 2017 that pay 10.375 percent and 2018 paying 7.375 percent for senior secured notes at the new interest rate that mature in 2021, the Wayne, New Jersey-based company said Thursday in a statement. Toys “R” Us will also pay as much as $150 million in cash for the 2017 notes.

Toys “R” Us is devoting cash to upgrade its stores, e-commerce and the shopping experience. It’s looking for ways to win back customers from discounters including Wal-Mart Stores Inc. and Target Corp. that attract a steady stream of shoppers with groceries and other basics, as well as online vendors such as Inc. The company said in June that it would refinance 89 percent of its existing notes, and that a third party had plans to buy as much as $50 million in new financing.

Focus on Operations

“This is the first step in a process to get the maturity profile into a place where it’s no longer an obstacle, so that they can focus on operations,” Noel Hebert, a Bloomberg Intelligence credit analyst, said in an interview. “Twelve percent and much closer proximity to a lot of the international operations -- I’d say that’s a pretty good exchange for the bondholders, given where they were six months ago.”

Toys “R” Us’s $450 million of 10.375 percent notes were unchanged at 99 cents on the dollar at 11 a.m. today. The 7.375 percent notes traded at 88 cents, down 25 cents. The new securities will be issued in private transactions by the company’s TRU Taj subsidiary to qualified institutional buyers and non-U.S. persons, the company said. At least $50 million of the $450 million 2017 notes will remain outstanding.

For the eight weeks ended June 25, same-store sales increased about 0.3% domestically and 1.6% internationally from a year earlier, the company estimated in a filing today. Net sales slid about $15 million to $1.39 billion excluding currency effects, the retailer said. The filing also outlined scenarios in which the company might not have sufficient cash to make payments on the new secured notes, including the U.K.’s vote to leave the European Union.

“We continue to execute on our refinancing plan, as we committed to last month, and now have formally launched the offer into the market,” said Amy von Walter, a company spokeswoman, in an e-mailed statement. “This marks another important step in our efforts to position the company for long-term growth.”

The Next Step

Toys “R” Us was taken private in a 2005 leveraged buyout by KKR & Co., Bain Capital LLC and Vornado Realty Trust. The latest debt overhaul may not be the last, according to Hebert.

“You can’t keep raising your interest costs when cash flow’s the problem,” Hebert said. “At some point you need a bigger bang sort of solution, versus just, ‘Hey, we’re going to stretch our maturity schedule and just pay more interest.’ ”

Cutting the company’s interest costs is critical for Toys R Us’s profits. In each of the company’s last three full fiscal years, the chain hasn’t earned enough from selling toys to cover its interest payments, after accounting for depreciation and other expenses, data compiled by Bloomberg show. 

For the 12 months ended Jan. 30, the company posted $409 million of operating income, a measure of earnings available to pay interest, compared with $426 million of net annual interest expense.

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