Toys R Us spreads narrow on refinancing moves

By Dena Aubin - Analysis

NEW YORK (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) and Target (TGT.N) 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.