Toys R Us puts CMBS into play to refinance UK debt

Retailer is believed to have lined up buyers for securitisation deal to help refinance UK property portfolio, pointing to new investor interest in CMBS

Toys R Us is thought to be refinancing the debt secured on its 30-strong UK store portfolio with a commercial mortgage-backed securitisation.

The new deal is rumoured to have been pre-placed with a number of investors. This would be a sign that demand for new CMBS from fixed-income investors is increasing – and not only for German multi-family housing deals, where most activity has been focused recently.

There is speculation that the out-of-town retailer’s adviser is Cairn Capital. This would also make the CMBS unusual, as the first this cycle to be structured and sold by a boutique restructuring and refinancing specialist, rather than an investment bank. Cairn Capital refused to comment.

US private equity investors Bain Capital and KKR, with Vornado Realty Trust, bought Toys R Us in 2005, in an operating company/property company deal.

The business needs to refinance about £405m of debt secured on its UK property and maturing in April. Some £345m of this maturing debt is securitised in a CMBS called Vanwall Finance, while about £60m is junior debt owned by Royal Bank of Scotland and Blackstone, held in their Isobel joint venture.

The assets’ value is known to have fallen below the value of the whole loan, putting the junior debt under water. But RBS and Blackstone would have to release their security for a new CMBS to be issued, so it is possible they will be repaid.

Earlier this month, Vanwall’s servicer, Situs Asset Management, appointed Brookland Partners as its financial adviser on the loan.

If the Vanwall loan is not repaid by April it is likely to be extended. One CMBS specialist said: “A new CMBS would highlight that restructuring is no longer about extending loans, but that new issuance is a tool that can be brought to bear and that there is investor demand for new product.”

At last November’s London conference of the Commercial Real Estate Finance Council Europe, Nassar Hussain of Brookland predicted that there would be between €5bn and €10bn of new CMBS issuance this year.

This compares with just £2.4bn issued in five deals since 2007. Deutsche Bank arranged three of these, secured on: Chiswick Park, in June 2011; Merry Hill shopping mall in February 2012; and 30,000 German multi-family homes for Vitus last September.

RBS arranged the others: Centre Park villages in February 2012, a combined CMBS and high-yielding issue; and the 37 loans in the Isobel joint venture, also last September.

Law firm Paul Hastings advised on Deutsche Bank’s 2011 and 2012 issues and said this month that it was advising on three more deals: “one conduit, one agency deal and a private placement”, according to associate Miles Flynn (see Analysis, ‘More CMBS may be served up as investors regain appetite’).

The private placement could be the Toys R Us deal, while Fortress-owned German multi-family housing business Gagfah is lining up a securitisation as part of a €2bn refinancing it needs to pull off by August.

Last month Toys R Us refinanced $250m of debt secured on French and Spanish stores that was due to mature in February. Deutsche Bank is believed to have provided finance with the retailer also putting up cash.