By Dena Aubin

NEW YORK, Nov 9 (Reuters) - Christmas has come early for
Toys R Us debt investors, as steps by the retailer to improve
its liquidity, including a refinancing announced on Monday,
have given its credit spreads a boost.

The largest U.S. specialty toy retailer, Toys R Us is
selling $650 million of senior secured notes to repay existing
loans, taking care of next year's refinancing needs before the
credit markets slow for year end.

The refinancing, along with the company's steady operating
results, prompted Standard & Poor's to raise its outlook on
Toys' rating to stable from negative, meaning a downgrade is
less likely over the long term.

Moody's Investors Service raised its outlook on Toys'
corporate rating to positive from stable, noting that the
company is posting solid operating performance despite a
difficult economic backdrop.

Toys' five-year credit default swaps tightened to 737 basis
points on Monday from 752 basis points at Friday's close,
according to Markit Intraday. The five-year swaps have
tightened from 997 basis points two months ago.

Toys' refinancing is its latest move to alleviate concerns
about a large amount of debt maturing in 2010. In July, it sold
$950 million of senior notes to help repay unsecured debt due
next year.

The latest refinancing, "coupled with what now appears to
be a decent turnaround story, has us looking to upgrade this
credit at least one notch," high-yield research firm KDP
Investment Advisors said on Monday.

Toys R Us is facing an especially competitive Christmas
shopping season, with big discounters such as Wal-Mart (WMT.N: Quote, Profile, Research)
and Target (TGT.N: Quote, Profile, Research) making big price cuts to grab market share.
But several initiatives Toys put in place after the company was
taken private in 2006 are showing promise, analysts said.

"One of them is the store conversion into a combo format,
which means they are putting more babies' products into
traditional toy stores or combining the two formats into a
combo store," said S&P analyst Ana Lai. "It helps traffic, and
babies' products are more consumable, so people come into the
stores more."

In a bid to boost holiday sales, Toys R Us in September
also announced it would open more than 80 pop-up or temporary
stores in malls and shopping centers, plus more than 260
"Holiday Express" shops in its Babies R Us stores. The company
is also opening FAO Schwarz boutiques in 585 Toys R Us stores
after acquiring the iconic toy retailer earlier this year.

"We feel that its holiday 2009 performance will be solid,
with its pop-up mall stores and FAO Schwarz in-store
departments likely to bear fruit as they represent a key point
of differentiation against the discounters," Moody's senior
analyst Charlie O'Shea said in a statement on Monday.

Toys' latest debt sale will benefit from voracious demand
for high-yield debt, the top-performing fixed-income asset this
year.

As bond prices have risen, borrowing costs for junk-rated
companies such as Toys R Us have dropped dramatically.

Yields on Toys' existing 7.625 percent notes due in 2011,
for example, have dropped to 6.95 percent from 8.26 percent a
month ago and more than 12 percent in July, according to
MarketAxess.

Toys on Monday estimated its same store net sales for its
North American businesses fell by 9 percent in the fiscal third
quarter as demand for video games softened. Still, the company
said lowered expenses and gross margin improvement more than
offset the sales decline.

(Reporting by Dena Aubin, Editing by Chizu Nomiyama)