After a tough syndication in which pricing was jacked up two times and an original issue discount (OID) was added, as was call protection, Toys "R" Us' $800 million term loan soared to 101 after breaking at 99 7/8-100 3/8. The attractive bells and whistles fired up demand, but left one trader suggesting agent banks may have overdone it, given how high the paper went.
Bank of America and Deutsche Bank lead the deal, which also includes a $200 million asset-sale facility. The credit was originally priced at LIBOR plus 3 3/4%, got flexed up to LIBOR plus 4 1/2% and finally settled at LIBOR plus 4 1/4%. The OID feature of 99 1/2 was added to improve yield, said a trader. Finally, 102 call protection for the second year was included to encourage investors to sign up. The asset-sale is priced at LIBOR plus 3%, going up to LIBOR plus 3 1/2% at three months and LIBOR plus 4% after six months. Bankers at the two banks declined comment.
The enticements reflect the changing attitude to low-priced and covenant-lite structures. When terms were pitched in June, the market was still open to tighter pricing and covenant-free deals, two factors, which in the current environment are causing a number of deals to be reworked. "The market changed a lot during that time. Buyers had more issue to choose from," a dealer said.
A loan salesman said the deal is popular with investors seeking high coupons in a sea of low priced deals. Another said the loan needed so many tweaks because many investors do not like the retail sector. Moody's Investors Service assigned a B1 rating to the new loans. Its outlook on the company remains negative.
Toys "R" Us will use the financing to pay off the $1.9 billion bridge loan used to fund the purchase of the company in 2005 by Bain Capital Partners, Kohlberg Kravis Roberts & Co. and Vornado Realty Trust. In a statement, Clay Creasey, cfo, said, "The interest rate payable under the new loan compares favorably to the current market yields for the outstanding public debentures of Toys "R" Us Inc. and reduces the interest that Toys "R" Us Delaware, Inc. will pay as compared to the bridge loan." A spokeswoman declined to comment further.