Deutsche Bank's $1.5 billion asset-based deal for Toys 'R Us hit the market last week and had some investors struggling with how to treat the credit, which is backed by $2.4 billion of unencumbered real estate assets. The deal is designed to partially take out the $1.9 billion bridge loan put in place for the $6.6 billion leveraged buyout by Bain Capital, Kohlberg Kravis Roberts & Co. and Vornado Realty Trust. It seems to be flying fine with investors who have in-depth real estate experience, but traditional corporate loan investors are having some trouble understanding it. "It's not a traditional real estate loan nor is it a corporate loan, it is more a kind of hybrid-type thing," one investor said.
The three-year deal is priced at LIBOR plus 2 3/4%. Commitments are due by Nov. 7. One investors said to play in the deal buyers need real estate expertise to truly understand the valuation that has taken place. "They want to do it in the bank loan market without a corporate guarantee," he said. "To look at it as a corporate credit is wrong. It's a bottoms-up real estate analysis. You need to look at each [store] to see if they have the assets to back up the loan."
Standard & Poor's assigned a B- rating to the facility and lowered its corporate rating to B- from B+. Its senior unsecured rating was lowered to CCC from B-. In its report S&P writes that the downgrade reflects the substantial debt following the merger. Total debt to EBITDA increased to 8.4 times for the 12 months prior to Aug. 2 due to the buyout. Calls to the company were not returned. A spokeswoman for Vornado and spokesmen for KKR and Deutsche Bank declined comment. A spokesman for Bain could not be reached.
