Well, that’s not fun…
Ratings agency S&P Global on Thursday pushed Toys R Us deeper into junk territory after it cut its corporate credit rating by one notch to ‘CCC+’ from ‘B-’ and placed all ratings on CreditWatch with negative implications, leaving it at risk of a further downgrade.
The agency said that its decision reflects the view that there is an “increased possibility” the private equity-owned US toy chain could address some of its debt due to mature in 2018 “at less than par or engage in a broader restructuring”.
The downgrade comes a day after reports that the New Jersey-based retailer has tapped lawyers to advise on restructuring its debt load and that bankruptcy could be one possible outcome.
Toys R US — which was taken private in a $6.6bn deal in 2005 by Bain Capital, Kohlberg Kravis Roberts and Vornado Realty Trust — has roughly $400m of secured and unsecured debt maturing in May and October 2018, and “significantly more in 2019″, according to S&P.
“Our previous concerns over capital market access for leveraged retailers such as Toys R Us has been sharpened by the very negative bond price reaction to these media reports,” S&P said.
And while the rating agency does not expect a broader restructuring, it does argue that the incentive for a timely refinancing of its debt maturities at par next year is now lower, given the drop in the price of unsecured debt due in 2018. S&P said:
We still view existing liquidity as sufficient for the upcoming holiday season and note that market prices for most other debt issues did not appear to decline even after the recent news. Still, with 2019 maturities looming and a lack of clear prospects for improving operating performance, we believe Toys’ capital structure may be unsustainable in the long term.
Aggressive discounting by competitors alongside the rise of e-commerce juggernaut Amazon and big box retailers like Target and Walmart have hurt the once-dominant retailer. It has seen same-store sales — a closely watched measure of sales in stores that have been open at least 12 months — fall for three consecutive quarters.
Reports of a possible Toys R Us bankruptcy comes as more than 20 retailers have already filed for bankruptcy in the first six months of the year — including Gymboree, Payless, BCBG — with the accumulated liabilities of all retailers that filed for bankruptcy rising to over $5bn in aggregate, according to accountancy firm BDO.
Stephanie Wissink, an analyst at Jefferies, argues that if a bankruptcy is imminent, she expects Toys R Us to consider a sale or divestiture of its own brand assets to fund its obligations. She said: “Toys R Us ‘private label’ brands across toys and baby do bear value in the consumer marketplace and companies like Hasbro, Spin Master Corporation, and Jakks Pacific, among others are likely to explore the acquisition of these brands on a distressed sale basis.”