July 24 (IFR) - Toys R Us CDS spreads are set to narrow
after the company decided to take a new senior unsecured term
loan that is currently being syndicated.
The loan is a six-year USD985m term loan B with proceeds
expected to refinance its USD950m 10.75% senior notes due July
The decision to raise cash via the loan market to refinance
Toys R Us Property Co I's, or prop co debt, 10.75% due 2017
bonds instead of issuing a high-yield bond will offer
flexibility by achieving a better pricing than a bond while also
lowering interest costs. Both will factor into tighter CDS
The term loan B is expected to be non-callable with call
protection for the first two years at 102 and 101, according to
Reuters Loan Price Corp (RLPC). The 10.75% due 2017 are
continuously callable at $102.69 with July 15, 2014 as the next
call date. A market source said there was no expectation the
bond will be called and it is trading above its call price at
Although it has no near-term maturities, Toys, like many
high-yield companies, was expected to take advantage of the low
interest rate, low volatility environment to further enhance its
credit profile by refinancing and tighten its CDS spreads.
But for Toys this is harder to achieve. The private equity
owned-company abandoned its IPO offering earlier this year and
also has no permanent CEO. In addition, it suffers from weak
fundamentals and revealed in the lender meeting its same store
sales fell 4.8% domestically and 3.6% internationally during the
first eleven weeks of the second quarter.
As such there has been growing speculation Toys would face
an increasingly difficult environment if it opted to refinance
via the debt market.
"Rising interest rates and general weakness in the retail
sector lately, are other factors which would hamper Toys'
ability to refinance in the bond market at a lower rate than
their current coupons," said a high-yield trader.
Moreover, the June ratings downgrade to B2 from B1 by
Moody's "also means the company's bond rate is going to go up,"
said the trader, therefore making refinancing via a bond a more
So the decision to go the term loan route is seen as a more
optimal choice as borrowing costs are likely to be below the
call premium of the 2017 bond and the term loan has the
flexibility to be pre-payable.
Synthetic investors are expected to respond positively not
only to the refinancing, but to the term loan as well. This
type of asset is considered to be of "better quality" than a
senior unsecured bond, since a secured or unsecured bond is
secondary to a loan.
The recovery rate of a CDS is improved by a term loan as the
overall capital structure is moved higher. This will eventually
impart a positive drive on its spreads and tighten synthetic.
Toys CDS is at 787.25.