This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com
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Investors in the CDS market are paying extra attention to this week’s launch of Toys “R” Us’ new USD 950m senior unsecured note offering, Debtwire reports. The deal’s novel structure could prevent the new bonds –which will be Toys “R” Us’ largest and most liquid issue - from being deliverable into existing CDS contracts, said buysiders, sellsiders and lawyers interviewed.
Bank of America is the lead book-runner on the deal, alongside Deutsche Bank, Goldman Sachs and Wachovia, the first two buysiders said. Citigroup, Credit Suisse and Morgan Stanley are co-managers.
The retailer’s new notes are being issued by subsidiary TRU 2005 RE Holdings, a bankruptcy remote special purpose entity, whose structure does not allow it to provide guarantees from the holding company, the sources said. TRU 2005 RE Holdings will later be renamed Toys “R” Us Property, according to a company press release.
While it is difficult to determine if the lack of deliverability is completely intentional, the move could effectively serve as a deterrent to CDS investors piling into the debt, said two derivatives lawyers. In recent months, financial advisors have focused on the dynamics of the CDS market and some are pitching strategies to protect issuers from negative basis investors who could have ulterior motives, said the first lawyer.
“They are calling it basis busters,” said the first lawyer familiar with the strategy.
Repeated calls to Toys “R” Us officials were not returned. A Bank of America spokesperson declined to comment.
The rules on CDS deliverables stipulate that opco debt should have qualifying affiliate guarantee language in its indentures, explained the first lawyer. If the notes are not deemed to be deliverables by the market, CDS written on the propco could begin trading, said the sources.
Toys’ existing debt soared last week following news of the financing. The company’s 7.625% holdco notes due 2011 traded up 9.75 points to 91.75, yielding 12.215%, according to MarketAxess. Its USD 1.3bn unsecured propco real estate loan was quoted at 98.25- 99.75, up from around 91, one buysider said.
The company’s five-year CDS also tightened four points to 17 points upfront, said a trader. Most of the Street was short risk in the name and they rushed to sell protection to cover on the news, said a second trader.
Toys plans to use proceeds from the bond sale to repay the unsecured real estate loan, which comes due in December 2010, according to a press release. The new notes will be issued as unsecured obligations because of lien limitations in the existing holdco indentures, said the third buysider.
However, to make the offering more palatable to investors, the notes will have a negative pledge on the real estate, said the first and third buysider. Under the arrangement, there will also be a master lease between Toys Delaware and TRU 2005 RE Holdings, the same buysider said. Toys Delaware will make monthly lease payments to TRU 2005, who in turn will use the rental income to support debt service on this new USD 950m of debt, he added.
As reported, investors had been worried on how Toys would deal with its 2010 maturities, which included the unsecured real estate loan, USD 800m of propco CMBS, and a USD 2bn ABL. The New Jersey-based toy retailer announced an agreement to extend its ABL facility to May 2012 from October 2010 last Wednesday. The size of the bifurcated loan will remain at USD 2bn through July 2010, and then drop to USD 1.5bn through May 2012.
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