Toys 'R' Us Bondholders Retain Moelis to Advise on Refinancing

NEW YORK (The Deal) -- Certain Toys 'R' Us Inc. bondholders have hired advisers to promote their interests as the toy retailer works out its debt refinancing plan.

A group of investors holding 7.375% senior holding company notes due 2018 has retained Moelis & Co. LLC to represent it in the refinancing discussions, a source familiar with the situation said.

"Right now, there is a difference in opinions" between the private equity-backed company and its 2018 bondholders about the priorities in a refinancing, the source explained.

The dispute with the 2018 holders centers on a covenant in their bond indenture that limits what Toys 'R' Us can pledge as security for new debt offerings, which would prevent the retailer from using the value of its real estate to secure new debt.

The 2018 noteholders "are trying to monetize the value of that covenant," the source said, explaining that they want some sort of benefit or premium for removing it. One potential benefit for the 2018 holders could be a structural move from the holdco level to unit Toys 'R' Us-Delaware Inc., the source said, but the source also noted the company isn't sold on the need to give those parties a premium to remove the covenant.

The source anticipated Toys 'R' Us is likely to refinance its debt due 2016 before the holiday season and leave further-out maturities to deal with later. The 2016 maturities include $355 million in 7.375% senior secured notes due Sept. 1, 2016, and a $643 million secured term loan facility.

A lot is riding on the company's performance during the fourth quarter, since holiday toy sales are a key indicator of how the retailer is holding up in the face of competition from online retailers and behemoth Wal-Mart Stores Inc., which has been amping up its presence in the toy space.

If the 2014 holiday season goes badly for Toys 'R' Us, then gaining the ability to use the value of its real estate to secure new debt could become a higher priority, the source said.

The person noted that Toys 'R' Us' decision to release second-quarter results early on Aug. 29 was "very unusual"; sources see that move as a sign the company is looking to take action on its refinancing sooner rather than later.

Sources also have perceived the company's summer hirings of new CFO Michael J. Short and new treasurer Chetan Bhandari, formerly a managing director at investment banking and restructuring firm GLC Advisors & Co. LLC, as signs that the refinancing process is heating up.

The early earnings release also could have been a way to give current investors access to key financial information without requiring them to go restricted, the source noted.

The company on Wednesday, Sept. 10, filed its Form 10-Q for the quarter ended Aug. 2 with the Securities and Exchange Commission.

An Aug. 29 statement highlighted improvements in adjusted Ebitda ($81 million, compared with $74 million during the same quarter last year) and positive comparable-store sales results. An inventory clearance effort, however, contributed to a decline in the company's margins.

Toys 'R' Us reported a net loss of $148 million during the second quarter, compared with a net loss of $113 million during the same quarter in 2013, an increase it blames on higher income taxes.

The company had $1.2 billion of liquidity at the end of the second quarter, including $353 million in cash and cash equivalents and $823 million in unused availability under committed lines of credit.

As of Aug. 2, it had $7.33 billion in assets, down from $8.31 billion a year earlier, and $8.24 billion in liabilities, up from $8.06 billion at the same time last year.

Fitch Ratings downgraded the notes held at the holding company level to CCC- in a June 26 report. The ratings agency expected the company's leverage would increase from an unspecified level to an adjusted debt-to-Ebitda ratio of nine times.

The Wayne, N.J., company went private in 2005 when a consortium including private equity firms Bain Capital LLC and Kohlberg Kravis Roberts & Co. LP, as well as Vornado Realty Trust, bought it for $6.6 billion.

The company's long-term debt totals about $5.4 billion. Its debt structure includes a $643 million secured term loan facility due in 2016, a $371 million incremental secured term loan due May 25, 2018, and a $209 million second incremental secured term loan due May 25, 2018, all obligations of Toys 'R' Us-Delaware.

The debt structure also includes $250 million drawn on a secured revolving credit facility for the Delaware unit that expires in 2019, a $969 million senior unsecured term loan for Toys 'R' Us Property Co. I LLC due 2019, $355 million in 7.375% senior secured notes of the Delaware unit due Sept. 1, 2016, $447 million in 10.375% senior notes due 2017, $720 million in 8.5% senior secured notes for Toys 'R' Us Property Co. II LLC due Aug. 15, 2017, $403 million in 7.375% senior notes due Oct. 15, 2018, and $22 million in 8.75% debentures due Sept. 1, 2021.

The company also has a $443 million U.K. real estate credit facility due 2020, $111 million in Toys 'R' Us-Japan Ltd. unsecured credit lines that expire in fiscal 2015 to 2016, $86 million in 1.85% to 2.85% loans for Toys 'R' Us-Japan due in fiscal 2014 to 2021, a $66 million Spanish real estate credit facility due 2015, a $61 million European and Australian asset-based revolving credit facility due 2016 and a $63 million French real estate credit facility due 2018.

A Moelis spokeswoman and a Toys 'R' Us representative declined comment. Representatives for Bain, and Vornado didn't respond to requests for comment.

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