Toys ‘R’ Us tumbles on legal hire, bankruptcy concerns; energy up; Caesars, Peabody firm on financing news

By Paul Deckelman

New York, Sept.6 – Toys ‘R’ Us, Inc.’s bonds were down sharply in active dealings on Wednesday – although almost all of the lower late-session trading came in smallish odd-lot transactions – in response to news reports indicating that the underperforming specialty retailer had hired legal advisers from a firm well known in bankruptcy circles, raising investor concerns that there could be a filing in the company’s future.

Elsewhere among distressed or underachieving credits, energy issues such as oil and gas exploration and production operators California Resources Corp., EP Energy Corp. and Denbury Resources Inc., as well as shale producer MEG Energy Corp. were seen better, in line with firmer oil prices. So were drilling concerns like Transocean Ltd., Noble Corp. and Atwood Oceanics Inc.

A pair of companies saw their bonds firm in response to news that they had lined up bank-loan financing – gaming concern Caesars Entertainment Operating Co., currently in Chapter 11, and coal miner Peabody Energy Corp., which emerged from bankruptcy earlier this year.

PetSmart, Inc.’s bonds improved ahead of the company’s release of quarterly earnings data.

Toys trades terribly

A market source said that the biggest bond-price movement on the day was in Toys ‘R’ Us’ 7 3/8% notes due 2018, which had finished out on Tuesday around 97¼ bid, opening around that same level on Wednesday morning.

However, at mid-afternoon, the bonds dropped down nearly 30 points, to around the 70 bid mark, and then continued to fall, with a number of trades taking place right around the 50 bid level.

The bonds ultimately bounced off those session lows and came back to finish at 78 bid – still down nearly 20 points on the day.

While there were a lot of transactions, traders did not see any of them as large round-lot dealings, but instead as mostly smaller odd-lot pieces.

The company’s 8¾% notes due 2021 fell to a closing price of 66 bid from about 95½ at midday and 98½ at the tail end of last week, the most recent prior trades.

Here too, activity was confined to smallish odd lots.

Toys “R” Us tumbled on news reports indicating that the Wayne, N.J.-based specialty retailer of toys, games and products for children and, through a separate division, for babies and toddlers) had hired the law firm of Kirkland & Ellis to help restructure its roughly $400 million in debt due in 2018 – raising investor worries that the underperforming store chain could conceivably file for bankruptcy protection.

While hiring such restructuring attorneys does not necessarily point to a bankruptcy filing ahead, it always looms as at least a theoretical possibility for debt-laden companies looking to restructure their obligations.

Toys “R”Us sought to downplay the significance of the hiring.

In a statement, it said that “as we previously discussed on our first quarter earnings call, Toys R Us is evaluating a range of alternatives to address our 2018 debt maturities, which may include the possibility of obtaining additional financing.”

It further said that it expects to provide an update about its restructuring activities on its upcoming fiscal second- quarter earnings call.

PetSmart paper pops

Also in the retailing segment, traders saw some upside movement in PetSmart, Inc.’s paper on Wednesday.

PetSmart “has recently been weak,” a trader said, “but seemed to get a reprieve today.” He saw the Phoenix-based pet food and pet supplies retailer’s 7 1/8% notes due 2023 up ¼ point at 81½ on “pretty good volume.”

A trader said that PetSmart “was more active,” ahead of the release of the company’s second-quarter report after Wednesday’s close, and its scheduled Thursday conference call.

“Maybe people are squaring up ahead of the numbers,” he suggested , locating the 7 1/8% notes in an 81-to-81½ context, while its 5 7/8% senior secured notes due 2025 were “a little better, a little north of 90,” from 89½ on Tuesday.

More than $29 million of the 7 1/8% notes changed hands, with a market source seeing them going home at 81 7/8 bid, calling that a 5/8 point gain on the day.

He saw over $17 million of the 5 7/8% notes trading, gaining 7/8 point as they finished above 90 bid, while its 8 7/8% senior unsecured notes due 2025 were perhaps ¼ point better on the session at 83¼ bid, with around $11 million traded.

Energy names improve

In the energy sphere, a trader said that “one of our bellwether oil-related names,” the California Resources 8% notes due 2022, gained more than 1 point on Wednesday to end at 56 7/8 bid, “with oil [prices] continuing to rally a little bit here.”

Several other traders also saw the Los Angeles-based oil and natural gas exploration and production company’s bonds finishing up around a point in the mid-50s, on turnover of more than $25 million.

Elsewhere in the E&P space, Plano, Texas-based oiler Denbury Resources’ 9% notes due 2021 gained 1½ points on the day to end at 91¼ bid, while Houston-based EP Energy’s 8% notes due 2025 were seen by a trader to have jumped more than 3 points, to around 66¾ bid.

Calgary, Alta.-based shale oil producer MEG Energy’s 7% notes due 2024 gained ¼ point to finish at 80¾ bid.

Among the energy drilling companies, Cayman Islands-based Noble Holding International’s 7¾% notes due 2021 were up by a deuce on the day at 81 bid, while its 6.20% bonds due 2040 gained 2¼ points, ending at 63¼ bid.

Swiss-based Transocean’s 7½% bonds due 2031 were up by 1¾ points at 87 bid, while Houston-based Atwood Oceanics’ 6½% notes due 2020 came off its day’s lows to end at 99 bid, up 1 point on the day, with over $22 million traded.

The E&P credits, and the drillers alike, benefitted from a second straight session of firmer world crude oil prices.

October-delivery West Texas Intermediate crude gained 50 cents in New York Mercantile Exchange trading Wednesday to settle at $49.16 per barrel, on top of Tuesday’s $1.37 per barrel jump, while November-delivery Brent crude oil moved in a similar trajectory both days in London dealings.

Murray Energy off

A trader said that “Murray Energy has been trading a lot lately,” seeing the St. Clairesville, Ohio-based coal producer’s 11¼% notes due 2025 down 1 point on the day to 57 bid, on “decent volume.”

At another desk, a market source, also seeing the Murray notes off by 1 point on the day, estimated volume at more than $13 million.

Peabody gains on financing

Also in the coal space, a trader saw St. Louis-based coal producer Peabody Energy’s 6 3/8% notes due 2025 gained ¾ point to end at 103 bid.

He also saw its 6% notes due 2022 go home at 103¾ bid, up ¼ point on the day

Peabody – which restructured its once-massive debt via Chapter 11 in a nearly year-long process, finally emerging from bankruptcy this past April – was meanwhile seen active in the bank debt market on Wednesday, launching a $647.6 million first-lien senior secured term loan B due March 2022 that is talked at Libor plus 325 basis points to 350 bps with a 1% Libor floor and a par issue price, according to a market source.

The term loan has 101 soft call protection for six months, the source said.

Goldman Sachs Bank USA is the bookrunner on the deal.

Proceeds will be used to reprice an existing term loan B from Libor plus 450 bps with a 1% Libor floor. The company is repaying $150 million of the existing term loan B, bringing the total pro forma size to $647.6 million.

In addition, with the repricing, the company is seeking an amendment to provide additional flexibility for share repurchases and dividends.

Caesars gets financing boost

Another familiar distressed name – Las Vegas-based gaming operator Caesars Entertainment Operating Co. – also gained on financing news, as its 8½% notes due 2020 moved up to 134 bid, a gain of 3¼ point on the day.

The company and its Chapter 11 debtor subsidiaries announced on Tuesday that they had obtained committed financing for $2.2 billion of proceeds to finance the fee and leasehold interests in Caesars Palace Las Vegas.

The proceeds from this new-money financing for a to-be-formed real estate investment trust will be used to repay CEOC’s existing debt in accordance with the terms of its plan of reorganization. The financing is comprised of a $1.55 billion mortgage loan, a $200 million senior mezzanine loan, a $200 million intermediate mezzanine loan and a $250 million junior mezzanine loan.

JPMorgan Chase Bank, NA, Barclays plc, Goldman Sachs Mortgage Co. and Morgan Stanley Bank, NA committed to provide the mortgage loan, and other lenders committed to provide the mezzanine loans.

Sara Rosenberg and Caroline Salls contributed to this review

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