Toys ‘R’ Us CMBS investors dig into ’dark value‘ as SASB seniors trade

16 March 2018

Investors are still analyzing the potential pricing fallout from liquidation plans for Toys “R” Us as certain exposed senior bonds traded or covered around a 98 area price this week, according to a portfolio manager, a debt advisor, and data from Solve Advisors and ICE Data Services.
 

“People are digging in and trying to figure out what the [CMBS] exposure is going to be,” said one New York-based debt advisor.
 

For instance, one trader was talking the single-asset/single borrower TRU 2016-TOYS A bond at an 85 dollar price on 9 March but appeared to be a “bottom fisher” who was seemingly attempting to profit from forced or panicked selling on the news, said Michael Pellerito, managing director of Solve Advisors. A USD 4.3m TRU A bond on an 11 AM EST Wednesday list covered at a price of 98-15, according to Solve. ICE Data Services also said TRU A bonds traded twice this week in the 98 handle area though it’s not clear if either was the same item from Wednesday.
 

Further down the TRU stack, the C tranche was price-talked as low as 40 late last week and has consolidated to the mid-high 80s this week, according to Solve.
 

Getting a handle on handles
 

In the wake of a liquidation or bankruptcy news, it’s not unusual for bids and offers on bonds with exposure to a troubled company to come in with talk in wide ranges “because recovery expectations differ among investors and also due to technical dislocations,” Pellerito said.
 

On Tuesday (20 March), the company will seek bankruptcy court approval of motions to wind down US operations and conduct store closing sales in the wake of extremely weak holiday 2017 sales results (see story, 16 March). The move is a dramatic shift from the reorganization route it had planned when filing for Chapter 11 protection in September.
 

There are 87 CMBS loans totaling USD 4.1bn of debt with exposure to Toys “R” Us as a tenant, according to a 15 March report from Wells Fargo. The debt shrinks to USD 1bn when counting just the store-level exposure as opposed to the property- and portfolio-level exposure. The USD 494.5m TRU deal tops the SASB exposure while CSFB 2005-C3 tops the conduit deals, in terms of percentage exposure. There are 12 loans with balances greater than USD 20m where Toys “R” Us makes up more than 20% of the gross leasable area.
 

“In a lot of deals, they weren’t the largest tenant, but they were the top two or three,” the debt advisor said. “So in this environment, filling that space is going to be tough and you’ll have co-tenancy issues.”

 

Testing ‘dark value’
 

Back in September, an analyst said a worst-case scenario of mass store closures seemed unlikely as the company indicated that the majority of its stores were profitable and companies typically don’t close locations that are performing well, as reported (see story, 19 September).
 

But the liquidation news and the continued deterioration of the retail real estate market in many areas across the country could make it more difficult for some TRU bondholders to get repaid than had been thought, according to a retail real estate consultant who was somewhat surprised by the speed of the company’s “meltdown.”
 

When the TRU deal backed by 123 Toys “R” Us and Babies “R” Us in 29 states was issued in 2016, Standard & Poor’s pegged its portfolio’s “dark value,” when vacant, at about USD 103 per sq ft, and its “lit” value at about USD 127, according to a 13 October 2016 report. S&P noted that the dark estimate accounted for lost rents, carrying costs and re-tenanting costs associated with a scenario in which Toys “R” Us defaulted on its master lease and vacated the stores.
 

While the valuation might have been more accurate at securitization, the retail consultant said that the emptied portfolio’s value is now more likely to fetch somewhere between USD 50 and USD 60 per sq ft.
 

“What has changed is, there’s only a handful of retailers that are expanding and they’re being really cautious,” he said. “And by definition, liquidation means it’s done in a compressed period of time, as is, and by its nature you’re always going to get less.” Some properties in big markets on the coasts would likely do better, he said.
 

If the empty properties fetch only USD 50 or USD 60 per square foot, the portfolio manager said he thinks the TRU A bonds would be repaid while the credit tranches could potentially be out of the money.

 

Unlucky ones

 

Still, despite the “unlucky ones” holding bonds with direct Toys exposure, the broader CMBS market isn’t significantly affected by this week’s news of liquidation, said one CMBS analyst. “Nobody’s been running for the hills, probably because [Toys “R” Us] has been relatively well flagged over time,” he said. “It’s another bad headline to add on to Dick’s and others and with that particular name it’s been death by 1,000 cuts.”

 

As such, there was little change in the outlook of CMBX investors in the wake of the Toys “R” Us news this week, he said.

 

The CMBX series have an average exposure of 47 loans totaling USD 1.5bn to the retailer, with the highest exposure in series 6 and the lowest exposure in series 11, according to a 15 March report from Morgan Stanley.

 

Composite spreads on the CMBX 6 BB series reached 1,228bps yesterday, up from 1,226bps on 14 March and the widest since 1,229bps on 12 March, according to data from IHS Markit.

 

Overall, the outlook for retailers might not be all doom and gloom. ”The brick and mortars are starting to fight back,” the debt advisor said. “They’ve picked themselves up and they are fighting back.”

 

CLICK HERE to view all Toys R Us Inc. Chapter 11 filings on Debtwire Dockets.