High yield bond and leveraged loan debt backing Toys ‘R’ Us jumped in the trading market this morning after the company announced plans to refinance the majority of its near-term unsecured debt maturities, of which $850 million is scheduled to come due in 2017 and 2018.
The targeted $448 million issue of 10.375% holdco notes due 2017 climbed more than eight points to 101, its highest level since Sept. 2013, trade data show. The company’s other pre-fallen-angel targeted notes, the $402 million issue of 7.375% holdco notes due 2018, changed hands in small clips around an 84 context.
Notably absent from the exchange, the $722 million 8.5% secured propco II notes due 2017 are up around two points on the news, trading in a 98–99 range, trade data show.
Sources speculate that the company could refinance those notes in the public market given J.C. Penny’s recent refinancing of its term loan facility.
On the derivatives front, the cost of a five-year credit default swap (CDS) for the issuer cratered by roughly 24%, to a 15.5/18.5-points-upfront market quote, according to Markit. That’s essentially $550,000 cheaper of an upfront payment, at $1.7 million at the mid-point, in addition to the $500,000 annual payment, to protect $10 million of Toys ‘R’ Us bonds. Moreover, it’s now about $3.1 million less expensive than records wides around 48 points upfront in December.
Over in the loan market, the Toys ‘R’ Us covenant-lite B-4 term loan due 2020 (L+875, 1% LIBOR floor) popped up to an 87.5/89.5 market, rising roughly three points on the news, sources said.
The company said it intends to refinance up to approximately 89% of the 2017 and 2018 holdco notes with new debt maturing in five years via an exchange offer, of which 50.2% have so far tendered. In addition, a third party has also agreed to purchase up to $50 million of new debt, filings show.
As per the terms of the offer, the holders of all the outstanding $402 million holdco notes due 2018, and up to $400 million of the $448 million holdco notes due 2017, will have the option to exchange for new 12.00% senior secured notes due 2021 issued through a new subsidiary “ExchangeCo,” with the maximum amount of new secured notes to be issued at $525 million; in addition to $50 million of privately placed notes.
Holders of the 2018 holdco notes will receive 90% of the new notes with no cash component for each $1000 tendered by the early tender date
Holders of the 2017 holdco notes have a “notes only option” to receive par payment in the new secured ExchangeCo notes if tendered by the early tender deadline, or a “notes plus cash” option for either 50% in cash with the balance paid in new secured notes at par if the 2017 notes participation level reaches 74.9% or above. Other scenarios are an option for 52.5% in cash and the balance paid in new secured notes at par if participation is within a range of 75–84.9%; 55% in cash with balance paid in new notes at 85% participation; or a pro rata share of $150 million in cash with the balance paid in new notes for participation above 85%.
Consideration for tenders after the early tender date will be 85% in the case of the 2018 notes and 95% in the case of the 2017 notes.
The new notes issued under the ExchangeCo entity will hold equity interests in the entities from the company’s Europe, Japan and Australia operations, as well as Wayne Real Estate Parent Company and the company’s 70% interest in Toys Asia JV.
Furthermore, the new secured notes will be guaranteed by the company and certain of the obligors under European ABL, and secured by a first-lien on all equity interests of ExchangeCo a second-lien on the equity interests of the collateral agent under the European ABL Facility.
The company will also assign the new ExchangeCo with up to $100 million of cash contributions to capitalize the new entity, to be funded by up to approximately $28 million from the Asia JV and up to approximately $24 million from Propco I, with the remainder funded by internal sources of cash.
Finally, the company also offered preliminary first-quarter results, estimating same-store sales growth of 0.9% and adjusted EBITDA of roughly $79 million, up 13% from the first quarter 2015.
Cash on balance sheet was roughly $680 million as of Jan. 30.
The $1.025 billion B-4 term loan was placed in June 2014 via Goldman Sachs, Bank of America Merrill Lynch, Wells Fargo, J.P. Morgan, Citigroup, and Deutsche Bank in part to repay the company’s 2016 debt maturities. The deal was seen as something of a “self-help” exercise by the market. Bank of America Merrill Lynch is administrative agent.
S&P Global ratings today affirmed its B– corporate credit rating on the issuer, while its corporate rating at Moody’s and Fitch remains B3 and CCC respectively.
Toys ‘R’ Us is working with Bank of America Merrill Lynch, Goldman Sachs, and Lazard. As reported, the company announced it had retained the group in February “to assist in the refinancing of its capital structure.”
Wayne, N.J.–based Toys ‘R’ Us is controlled by Bain Capital, KKR, and Vornado Realty Trust. – Rachelle Kakouris
Follow Rachelle and LCD News on Twitter.
This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.