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Toys 'R' Us Has Time To Craft Turnaround, Despite Troubles

NEW YORK (The Deal) -- Toys 'R' Us just may have gotten the liquidity it needs to make next Christmas, and a few ones after that, a happy one for tots - as it reduces debt and revamps its operating procedures.

Although the Wayne, N.J.-based toy retailer is not imminently facing a potential bankruptcy filing, it still has a way to go until its private equity backers can expect to seek an exit.

That's because, with the company refinancing its $1.85 billion senior secured revolving credit facility and pushing out maturities until 2016, industry sources said it has at least a year or two to craft its turnaround.

But it will also mean that private equity firms Bain Capital LLC and Kohlberg Kravis Roberts & Co. LP, as well as Vornado Realty Trust, which took the company private in 2005 for $6.6 billion, will have to wait a bit longer to make their exit.

The backers were hoping to exit the retailer around this time, an industry source said, but plans for an initial public offering were pushed back at least another couple of years by dismal earnings figures. It already filed for an IPO in 2010 but then withdrew it a year ago.

For the year ended Feb. 1, Toys 'R' Us generated about $12.5 billion in net sales, compared to about $13.5 billion for the same period a year prior, according to the company's earnings report released Monday, while the company's profits plummeted to a net loss of about $1 billion from net earnings of nearly $40 million for the same period a year earlier. Ebitda dropped for the fiscal year to $35 million from about $960 million the year prior, while adjusted Ebitda, according to the company, was nearly $600 million, down from about $1 billion.

Besides the credit facility, which the company announced it refinanced on March 26, Toys 'R' Us had $644 million in cash and cash equivalents as of Feb. 1, according to Monday's earnings statement.

At the same time, the company said last week it had reduced total long-term debt by about $320 million, to $5 billion.

Toys 'R' Us also has valuable real estate it has yet to monetize, one source said.

One person familiar with the company noted that its bonds were trading as though it had nearly a 75% chance of defaulting over the next five years.

"It is trading with a lot of hair on it," the source said, meaning it is complicated bet.

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