Toys R Us spreads to narrow on term loan, refinancing

The loan is a six-year USD985m term loan B with proceeds expected to refinance its USD950m 10.75% senior notes due July 15 2017.

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 spreads.

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 $106.68.

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.

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