Toys ‘R” Us’ 7 7/8% notes of ’13 and its 8 3/4%s of ’21 dropped about three points last week on speculation the retailer might split its Babies ‘R’ Us unit into its own company. Bondholders are worried the new entity will be split off but will not assume any of the $2.3 billion in outstanding debt. “Its debt was initially issued as investment-grade, so it doesn’t have the protection associated with a junk issue,” explained one bondholder worried about the potential split. “We’re hoping bondholders will force Toys to do the right thing and have Babies take a third of its debt,” he added.
Charles O’Shea, v.p. and senior analyst at Moody’s Investors Service, noted the concerns arose because stockholders, not bondholders, were mentioned in the company’s announcement about the potential split. But O’Shea said he believes the omission was an oversight and that Toys has nothing to gain by loading itself up with debt. He expects the company to remain friendly to bondholders.
Calls to John Eyler, chairman, president and ceo of Toys, were returned by a spokeswoman who declined comment, citing a quiet period ahead of a pending earnings announcement.
