Moody's downs Toys "R" Us

Moody's Investors Service said it downgraded the corporate family rating of Toys "R" Us, Inc. to B1, the senior unsecured notes rating to B3 and the speculative-grade liquidity rating to SGL-2 and left all ratings on review for possible further downgrade.

These actions result from the significant increase in leverage as a result of the July 21 closing of the acquisition of Toys "R" Us, Inc. by a consortium consisting of Kohlberg Kravis Roberts & Co., Bain Capital Partners LLC and Vornado Realty Trust for $6.6 billion plus the assumption of debt, the agency said.

Moody's noted the downgrades reflect the very significant increase in funded debt following closing of the acquisition - ff the $6.6 billion purchase price, the acquirers have contributed $1.2 billion in cash, leaving $5.4 billion to be financed via a combination of existing cash balances and committed debt facilities, in addition to the assumption of debt.

The downgrade to SGL-2 of Toys' speculative-grade liquidity rating reflects the reduced financial flexibility as a result of the increase in leverage, which will impact free cash flow and the tighter covenants in the bridge facilities, as well as the very limited alternative sources of liquidity available as a result of the pledging of all operating assets, the pledging of real estate necessary to secure the $800 million in CMBS financing and the negative pledge on all real estate, the agency said.

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