- Toy retailer must refinance in “challenging” environment
- Outlook cut to “negative”
- Corporate-credit rating affirmed at B-
The outlook for Toys “R” Us Inc, the Bain Capital Private Equity-backed toy retailer, has weakened because the company will have to refinance certain debt in what will be “challenging” capital markets, Standard & Poor’s said.
S&P analyst Robert Schulz cut the outlook on the Wayne, New Jersey, company to “negative” from “stable.” He affirmed his B- corporate-credit rating on the company, whose holders also include KKR and Vornado Realty Trust.
S&P might lower its rating on Toys “R” Us if the risks to its ability to refinance its 2018 debt maturities or to otherwise sustain its capital structure increase, the analyst said. Or it could cut the rating if it concludes that the company couldn’t refinance its 2018 maturities at par.
Some $400 million of secured and unsecured debt is maturing in May and October 2018, and additional debt the following year, Schulz said.
The outlook cut reflects “the potential for challenges to a timely refinancing over the next year of the 2018 debt maturities, given the volatile capital-market environment for most leveraged specialty retailers,” Schulz wrote in a June 19 report. This “[heightens] refinancing risk,” he said.
The affirmation of the B- rating is based on “existing liquidity, and expected operational progress to support refinancing,” the analyst wrote. Market prices for the 2018 and 2019 debt maturities appear near par, he said.
Intense competition from online and large big-box retailers will pressure market share and revenue, Schulz said. But he also expects “modest free operating cash flow in 2017” after inventory grew in 2016 and used cash.
“Inventory issues remain a risk, and the company remains dependent on the holiday season for a majority of EBITDA and cash flow,” he said.
S&P expects profit in 2017 to decline modestly on low-single-digit revenue declines, “partly offset by cost reductions,” Schulz said.
Toys “R” Us and Bain Capital Private Equity declined comment.
Action Item: Contact S&P analyst Robert Schulz at email@example.com.
Update: This story has been updated to reflect that Toys “R” Us’s holders also include KKR and Vornado Realty Trust.
People line up outside a Toys R Us store just before midnight to purchase toys in advance of the film “Star Wars: The Force Awakens” in Times Square in the Manhattan borough of New York, September 3, 2015. Photo courtesy Reuters/Carlo Allegri