CHICAGO - (Business Wire) Fitch Ratings has assigned an Issuer Default Rating (IDR) of 'B-' to Toys 'R' Us Property Co. II, LLC (previously known as Giraffe Holdings, LLC) and rates Toys 'R' Us Property Co. II, LLC's new $650 million senior secured notes 'B+/RR2'. The notes are secured by first-priority liens on 129 properties held in a bankruptcy-remote entity with a Master Lease covering all the properties, which requires Toys Delaware to pay all costs and expenses related to the ownership, operation, leasing and maintenance of the properties. In addition, while the property company currently does not have any subsidiaries, the notes will benefit from guarantees by any future subsidiary of the property company. Proceeds from the offering, an intercompany loan and a cash contribution from Toys 'R' Us, Inc. (TOY), as well as the release of restricted cash and cash on hand will be used to repay the existing $600 million Giraffe Holdings CMBS facility and $200 million MPO Holdings CMBS facility. Fitch has also affirmed the following ratings:
Toys 'R' Us, Inc.
--IDR 'B-'
--Senior Unsecured Notes 'C/RR6'
Toys 'R' Us - Delaware, Inc.
--IDR 'B-'
--Secured Revolver 'B/RR3'
--Secured Term Loan 'CC/RR6'
--Unsecured Term Loan 'CC/RR6'
--Senior Unsecured Notes 'CC/RR6'
Toys 'R' Us Property Co. I, LLC (previously known as TRU 2005 RE Holding Co.)
--IDR 'B-'
--Senior Unsecured Notes 'B+/RR2'
Toys 'R' Us Europe, LLC (previously known as Toys 'R' Us (UK) Ltd.)
--IDR 'B-'
--Secured Revolver 'B/RR3'
The Rating Outlook is Stable. TOY had $5.6 billion in debt outstanding on Aug. 1, 2009.
The ratings reflect TOY's successful operating strategy which has generated positive free cash flow and the company's adequate liquidity. The ratings also reflect pressures on operating results given the current challenging environment, TOY's highly leveraged balance sheet and the intense competition in the toy retailing sector.
TOY's juvenile strategy of having side-by-side Babies 'R' Us and Toys 'R' Us stores, broad toy offering and exclusive and private label products helped produce relatively steady operating results in the last twelve months (LTM) ended Aug. 1, 2009 compared to fiscal 2008 which ended Jan. 31, 2009. LTM revenues declined 3.3% and LTM operating EBIT margin remained flat at 3.8% during the same period despite the weak economy. In addition, TOY generated positive free cash flow of $204 million for the LTM period as a result of solid working capital management.
The company has adequate liquidity with $149 million of cash as of Aug. 1, 2009 and capped availability of $988 million under its domestic $2 billion senior secured revolving credit facility. TOY's international subsidiaries recently entered into a three-year GBP112 million senior secured asset-based revolving credit facility which replaced the company's multi-currency credit facility. With the successful offering of the current notes issuance, TOY will have addressed its 2010 refinancing needs.
While TOY's credit metrics have been relatively stable in the past 18 months, its leverage ratio remains high with LTM adjusted debt/EBITDAR of 6.9 times (x) and LTM EBITDAR coverage of interest and rent of 1.5x. Fitch anticipates sales will continue to be pressured in the near term given the current challenging operating environment. However, the company's continued implementation of its juvenile strategy and cost control efforts will help operating margins to remain steady. This, combined with lower debt, should lead to credit metrics improving slightly from the current levels.
Of concern is the strong competition in the toy retailing business. TOY competes with a number of retailers, including other toy retailers, discounters, and catalog and internet businesses. Fitch expects price competition will continue to be intense this holiday season as retailers seek to drive traffic into the stores.
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Fitch Ratings
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or
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