New York: Fitch has affirmed its
ratings of Toys 'R' Us, Inc. as: -- Issuer
Default Rating 'B-'; Toys 'R' Us, Delaware -- Issuer
Default Rating 'B-'; TRU 2005 RE Holding Co. -- Issuer
Default Rating (IDR) 'B-'; Toys 'R' Us (UK) Ltd. -- Issuer
Default Rating (IDR) 'B-'; The affirmations and change in TOY's outlook reflect management's turnaround efforts which have led to improving performance at TOY's core U.S. toy segment as well as the steady performance in the international toy and Babies 'R' Us segments. The ratings also reflect TOY's highly leveraged balance sheet and the intense competition in the toy business. TOY's U.S. toy segment reported
positive comparable store sales in 2006 after 5 years of negative
comparable store sales as a result of store remodeling initiatives such
as Toys 'R' Us and Babies 'R' Us side by side stores, exclusive product
offerings and improved customer service. In addition, the
company's international toy and Babies 'R' Us segments continued to
achieve low to mid single digit comparable store sales. This
combined with management's turnaround efforts, such as better inventory
management, have resulted in operating EBIT margin expansion of 150
basis points to 4.4% in the last twelve months ending May 5, 2007 from
2.9% in 2005 and free cash flow generation of $364 million. As
a result, TOY's leverage has strengthened with LTM adjusted debt/EBITDAR
decreasing to 6.8 times from 8.1x in 2005, but it remains high. In
addition, LTM EBITDAR coverage of interest and rent weakened Fitch anticipates gradual operating performance improvement this year as the company rolls out more Toys 'R' Us and Babies 'R' Us side by side stores which produce higher sales as compared to single concept new stores, as well as store resets that are expected to improve the overall shopping experience in the fall of 2007. Additionally, management's efforts to control costs should allow the company to sustain its operating margins despite strong competition from other toy retailers, discounters, and catalog and internet businesses. The ratings of the various classes of debt listed above reflect their respective recovery prospects. Fitch's recovery analysis assumed an enterprise value of $3.6 billion in a distressed scenario. Applying this value across the capital structure results in good recovery prospects (51%-70%) for the asset-based revolvers which are secured by inventory, receivables and certain Canadian real estate in North America and all assets in Europe. The secured term loan and asset sale
facility are secured by intellectual property and second liens on
accounts receivable and inventory of TOY-Delaware and the guarantors,
and have below average recovery prospects (11%-30%). The
senior unsecured debentures at TOY-Delaware have poor recovery prospects
(less than 10%). The senior unsecured notes at the holding company level
are structurally subordinated, and are rated 'CCC-/RR6', also reflecting
poor recovery prospects (less than 10%) in a distressed case. |
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