Toys 'R' Us confident in ability to refinance upcoming short-term debt

By Paul Deckelman

New York, Dec. 18 - Toys 'R' Us Inc. closed out the 2012 fiscal third quarter with about $2.3 billion of liquidity and is confident that it has the resources - or can obtain them - to repay some $1 billion of debt coming due within the next 12 months, most of it connected with its European operation.

However, a senior executive of the Wayne, N.J.-based retailer of toys, games and other products aimed at babies and children cautioned that economic weakness in Europe could negatively impact such efforts.

The company reports its results on a consolidated basis, including the results for the parent company, its principal operating unit, Toys 'R' Us, Delaware, Inc. and its two property subsidiaries, Toys 'R'Us Property Co. I, LLC and Toys 'R' Us Property Co. II, LLC, which actually own most of the company's U.S. stores and lease them back to Toys-Delaware. The results also include its overseas subsidiaries in Japan, Australia and Europe.

On that consolidated basis, according to the latest Toys 'R' Us ' 10-Q filing with the Securities and Exchange Commission, the company's overall debt load as of the end of the fiscal third quarter on Oct. 27 was about $5.7 billion, of which $3.5 billion was secured.

Optimistic on short-term debt

On the company's conference call for its debt holders following the release of results for the quarter, controller and principal accounting officer Charles D. Knight told investors that the $1 billion of short-term debt included $896 million of European debt borrowing, principally related to its operations in France, Spain and the United Kingdom. He said the company was currently in discussion with various lenders and advisors on this, but could not provide further details.

The Toys 'R' Us executive said that the retailer ended the third quarter with $2.3 billion of liquidity, including cash and cash equivalents of $399 million and unused available committed lines of credit of $1.9 billion.

He said that $132 million of the cash and $1.6 billion of its revolving credit facility availability was at the Delaware subsidiary, as was $2.7 billion of third-party debt.

He said that at the quarter's end, the parent company had access to a total of $557 million of liquidity, comprised of short-term intercompany receivables, which could be funded through availability under its asset-based lending facility and its European ABL facility.

"We may consider using a significant portion of these funds in connection with the refinancing, extension or amendment of the maturing facilities," he said, "subject to the availability of commercially reasonable terms for any refinancing, extension or amendment of the real estate credit facilities.

"Therefore, based on funds available at the parent company and our discussions with various lenders or advisors, we believe that we have the ability to refinance, or repay a portion of and refinance, these credit facilities prior to maturity.

But he warned, "Given that our upcoming maturities are concentrated in Europe, the weakness of the European economic climate could reduce or restrict our ability to refinance these debt obligations on favorable terms."

Bond deal for redemption

During the quarter, Toys 'R' Us visited the junk bond market, pricing an upsized $450 million issue of 10 3/8% five-year senior notes.

That quick-to-market deal, increased from an originally planned $350 million, priced at 99.033 to yield 10 5/8% on July 26 - technically just as the fiscal second quarter was ending, although it closed at the beginning of the third quarter.

Proceeds from the offering were used to fund the redemption of the company's $400 million of then-outstanding 7 7/8% senior notes due in 2013.

Besides the new bonds, the company's balance sheet at the end of the quarter included, among other borrowings, $357 million of 7 3/8% senior secured notes due 2016 issued by Toys-Delaware, the company's nearest-term bonds; $933 million of outstanding 10¾% notes due 2017 issued by Toys 'R' Us Property Co. I; $718 million of 8½% senior secured notes due 2017 issued by Toys 'R' Us Property Co. II; and $404 million of 7 3/8% senior notes due 2018 issued by the parent company.

Domestic bank debt included $110 million of borrowings under Toys-Delaware's secured revolver due 2015 and $679 million of its secured term loan debt due 2016, as well as $392 million due under its incremental term loan facility due 2018 and an additional $220 million also due in 2018 under a second Delaware incremental term-loan agreement.

Interest expense increases

The controller noted that interest expense for the quarter was $135 million - up $29 million from the year-ago third period.

He said that the increase in interest expense was primarily due to the issuance of the 2017 notes and the repayment of the outstanding 2013 notes, which included a make-whole premium of about $18 million.

The company's net loss for the quarter was $105 million, compared with $93 million in the prior year. Knight said that the single largest element in the larger net loss was the increase in interest expense with the make-whole premium on the old bonds.

He said that excluding the after-tax impact of the expenses associated with the refinancing, the net loss would have been unchanged from the prior year.

Adjusted EBITDA was $31 million versus $36 million in the year-ago quarter, while year-to-date adjusted EBITDA at the end of the third quarter was $298 million versus $305 million a year ago.

Knight said that year-to-date cash used in operating activities was $449 million lower in the latest nine-month period than during the comparable time in 2011, "which demonstrates our continued focus on managing working capital more effectively."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.