Most-Read Stories on TCR - Top Stories

TOYS 'R' US: Fitch Affirms B- Issuer Default Rating

Troubled Company Reporter , June 22, 2007

New York: Fitch has affirmed its ratings of Toys 'R' Us, Inc. as:

Toys 'R' Us, Inc.

    -- Issuer Default Rating 'B-';
    -- Senior unsecured notes 'CCC-/RR6'.

Toys 'R' Us, Delaware

    -- Issuer Default Rating 'B-';
    -- Secured revolver 'B/RR3';
    -- Secured term loan 'CCC+/RR5';
    -- Secured asset sale facility 'CCC+/RR5';
    -- Senior unsecured debentures 'CCC/RR6'.

TRU 2005 RE Holding Co.

    -- Issuer Default Rating (IDR) 'B-';
    -- Structured credit facility 'B/RR3'.

Toys 'R' Us (UK) Ltd.

    -- Issuer Default Rating (IDR) 'B-';
    -- Multicurrency Sec. revolver 'B/RR3'.

In addition, Fitch has assigned a rating of 'CCC/RR6' to the $180 million unsecured term loan at TOY-Delaware.  Approximately $6.0 billion of debt is affected by these actions.  The Rating Outlook has been revised to Stable from Negative.

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
slightly to 1.4x from 1.5x in 2005 because rent increased due to
the consolidation of TOY-Japan results.

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.

About the InterNet Bankruptcy 
LibraryBack to Most-Read List

TCR Top Stories is a daily newsletter that contains ten news item extracts from the news reports in the Troubled Company Reporter.  It's free and delivered to you every business day via email.  To view and join this free service, click here.

Subscribe to the Troubled Company Reporter.

Learn more about the  Troubled Company Reporter