toy credit report 04_22_16 full report

a n i n d e p e n d e n t v i e w

FOR IMPORTANT DISCLOSURE INFORMATION relating

to analyst certification and the recommendations and references

herein, please refer to the Disclosure Appendix included as the last

page of this document. The information contained herein was

obtained from sources we believe to be reliable but we do not

guarantee its accuracy or completeness. Investors should consider

this document as only a single factor in making their investment

decision. R.W. Pressprich and associated individuals may hold

positions in securities discussed herein and make purchases and

sales of such securities from time to time. Copyright 2016.

See last page for more information

For more reports visit www.Pressprich.com

452 F i f t h Avenue , New Yo rk , New Yo rk 10018 | Te l 2 12 . 832 . 6200 175 F ede r a l S t r e e t , Bo s t on , M a s s a c hu s e t t s 0 2110 | Te l 6 17 . 482 . 9151 10 Sou t h R i v e r s i d e P l a z a , Ch i c a go , I l l i n o i s 6 0606 | T e l 3 12 . 32 4 . 3144

15600 36 t h Avenue No . , M inne apo l i s , M inne so t a 5 5427 | Te l 7 63 . 252 . 1652

• We reiterate our “Buy” recommendation for the Toys ”R” Us, Inc. 10 3/8% Holdco Senior Notes due ’17 and its 7 3/8% Holdco Senior Notes due ’18. RWP projects that the Toys “R” Us, Inc. credit will continue to improve with the help of international store growth, forecast-ed limited FX headwinds that had reduced 2014 and 2015 reported profits and the continued roll out of “Fit for Growth” and other cost savings. Implicit in our Holdco Note recommen-dation is our calculation that the Toys “R” Us-Delaware, Inc. bank debt is worth par. Our expected value for each of the Holdco Senior Notes in a bankruptcy case is 94% of face val-ue plus coupon payments to the earlier maturity date of the 10 3/8s.

• We reiterate our “Buy” recommendation for the Propco II 8.5% Senior Secured Notes due ’17 and believe that they are worth face value. We expect that the Company will have the flexibility to refinance its $725 million 8.5% Senior Secured Notes due ’17 on or before its 12/01/17 maturity. A refinancing could be more readily accomplished because of Propco II’s $91.4 million of cash, which reduces net debt to $630.6 million. We expect that additional free cash flow cash will reduce net debt to less than current levels prior to the late 2017 ma-turity.

• We have increased our Toys “R” Us, Inc. 2016 Adjusted EBITDA estimates from $826 million to $854 million and introduce our 2017 Adjusted EBITDA estimate at $897 mil-lion. Key drivers for Adjusted EBITDA growth include the Company’s continued effective implementation of its cost savings program, international property/licensee expansion, as-sumed Canadian and modest international same store sales growth, stable gross margins and no foreign exchange headwinds.

• Credit metrics are projected to continue to improve in 2016 and 2017 as a result of grow-ing Adjusted EBITDA and free cash flow that is projected to reduce debt. Our model fore-casts a reduction in net leverage from 5.1x in 2015 to 4.6x at year end 2016 and 4.2x at year end 2017.

• Liquidity is projected to improve in each of the next two years. Our model indicates that Toys- Delaware, Inc. will also begin to build up its cash balances in 2017. We target year end domestic ABL availability of $964 million in 2016 and 2017. Including cash, total li-quidity is projected at $1,657 million at year end 2016 and $1,791 million at year end 2017.

• Though we do not have a formal bank debt recommendation, we believe that the Toys “R” Us-Delaware, Inc. bank debt is worth par. We provide an extensive CH.7 waterfall in our expanded report (that is available upon request) to support our conclusion in such a scenario.

A Statement of Risk can be found on the final page of the report.

Business Description: Toys “R” Us, Inc. is a leading global specialty retailer of toys and juve-nile products, which include a variety of products in the core toy, entertainment, juvenile, learning and seasonal categories. The Company operates approximately 1,610 stores (of which 865 are domestic stores) and licensed an additional 186 stores in 36 countries.

Steven Ruggiero, CFA

Head of Research

[email protected]

212-832-6380

Toys “R” Us, Inc. (TOY) April 22, 2016

Recommenda ons

BUY Toys Propco II 8.5% Senior Se-

cured Notes due 2017

BUY Toys “R” Us, Inc. 10.375% Senior

Notes due 2017

BUY Toys “R” Us, Inc. 7.375% Senior

Notes due 2018

Recommenda ons: Buy

Reiterate “Buy” recommenda�ons. Bankruptcy valua�on indicates 94% of

FV for Holdco Senior Notes.

Debt Capitalization 01/30/16

Debt ($ millions)

Toys Propco II Senior Sec'd Notes 8.500% 12/1/2017 Ba3/B 725 97.750 709 10.05% 924 7.2x

Toys - Delaware Debt:

ABL Facility due '19 L+150bp 3/21/2019 80 100.000 80 2.140%

New Toys Delaware FILO T/L L+725bp 10/24/2019 Ba3/B+ 273 102.000 278 7.600%

B-2 & B-3 T/L L+375bp 5/25/2018 B3/B 195 83.000 162 16.170%

New Toys Delaware B-4 T/L L+875bp 4/24/2020 B2/B 1,002 84.000 842 15.230%

8.75% debentures 8.750% 9/1/2021 Caa1/CCC 22 72.000 16 16.900% 1,556

Finance/Cap lease obligations 184 184

Total Toys - Delaware Debt: 2,481 2,271 5.6x

Propco l T/L L+500bp 8/21/2019 Caa1/B 923 91.000 840 9.190%

Foreign Debt misc 471 471

Toys "R" Us Holdco Senior Notes 10.375% 8/15/2017 Caa2/CCC 450 92.500 416 16.99% 1,618

Toys "R" Us Holdco Senior Notes 7.375% 10/15/2018 Caa2/CCC 400 79.000 316 18.32% 1,751

Other Debt 29 29

Total Toys "R" Us, Debt 4,754 4,159 5.9x

(Note that the amt. o/s indicated for the 8 1/2s, 10 3/8s & the 7 3/8s are listed @ face value.)

(Source: Company Financials, RWP Estimates)

LTM O/S

LeverageCoupon

Amount

Outs.

Indicative

Mid-Mkt

Mkt

ValueSpreadYTWM/S&PMaturity

2

Toys “R” Us, Inc.

Summary and Recommendation

We reiterate our “Buy” recommendation for the Toys “R” Us, Inc. 10 3/8% Holdco Senior Notes due

’17 and its 7 3/8% Holdco Senior Notes due ’18. Our expected value for each of the Holdco Senior

Notes in bankruptcy is 94% of face value plus coupon payments to the earlier maturity date of the 10 3/8s.

Notwithstanding this valuation as provided for in detail in our expanded research report, RWP projects

that the Toys “R” Us, Inc. credit will continue to improve with the help of a number of factors that

include international store growth; fewer FX headwinds that had reduced 2014 and 2015 reported profits

and the continued roll out of “Fit for Growth” and other cost savings, including those derived from two

NYC store closings. Needless to say, we expect that the Company will exchange or refinance the 10

3/8% Holdco Senior Notes due ’17 and the 7 3/8% Holdco Senior Notes due ’18 to preserve – what we

view to be - the PE sponsors’ equity interests in Toys “R” Us, Inc. We continue to believe (as we stated

in our most recent previously published research report) that a regular way refinancing for the $850

million of Toys “R” US, Inc. Holdco Notes would be difficult at this time. An IPO is also premature.

International subsidiary guarantees are likely an important component of an exchange for both the 10

3/8% Holdco Senior Notes due ’17 and its 7 3/8% Holdco Senior Notes due ’18. We believe that there

is sufficient cash at Holdco subsidiaries to partially reduce the face value of the Toys ”R” Us, Inc. 10

3/8% Holdco Senior Notes due ’17 and its 7 3/8% Holdco Senior Notes due ’18 in an exchange or

refinancing.

We would expect, that for the reasons that we elaborate on in detail in our expanded report, a

simultaneous exchange of both the 10 3/8s and the 7 3/8s is likely in the best interests of both debt and

equity holders. We also point out that should there be an exchange, then Holdco Note holders would best

be suited to structure a “face value exchange” to retain their full claims should a future bankruptcy occur.

Though we do not have a formal bank debt recommendation, we believe that the Toys “R” Us-

Delaware, Inc. bank debt is worth par. We provide an extensive CH.7 waterfall in our expanded report

(that is available upon request) to support our conclusion, but in summary we believe that coverage of the

B-2, B-3 and B-4 loans are at least 1.66x covered on a liquidation basis. We also provide a CH.11

analysis that indicates full coverage of the term loans in such a scenario plus significant unsecured claim

coverage. We utilize a 5.0x valuation multiple at Delaware for this waterfall.

Cash build-up at the Toys “R” Us, Inc. non-Delaware Holdco subsidiaries could help to facilitate the

upcoming 10 3/8% Holdco Senior Note maturity. Our model projects that consolidated cash will be

$693 million at year end 2016 with Holdco and subsidiaries other than Delaware having approximately

$495 million of cash balances at year-end 2016. At year end 2015, the Company’s cash was located at

various subsidiaries as shown in the table below:

3


We reiterate our “Buy” recommendation for the Propco II 8.5% Senior Secured Notes due ’17. We

expect that the Company will have the flexibility to refinance its $725 million 8.5% Senior Secured Notes

due ’17 at its 12/01/17 maturity. Our analysis indicates that a refinancing of the Propco II notes could

more readily clear the markets as a result of Propco II’s cash on hand, which was $91.4 million at year-

end 2015. Net debt is approximately $630.6 million and expected to decrease further during 2016 and

2017 as a result of ongoing free cash flow generation at Propco II.

Propco II’s master lease agreement with Toys “R” Us-Delaware, Inc. has afforded Propco II

approximately $35 million of annual free cash flow with distributions upstreamed to Delaware at the rate

of approximately $11 to $14 million per year. Also, the expected continued deleveraging of Toys “R”

Us-Delaware, Inc. as a result of projected future operating income and free cash flow growth will provide

important underpinnings for both the Delaware and the Propco II credits with Delaware expected to

become a stronger Master Lease counterparty. We project that total and net leverage at Toys “R” Us-

Delaware, Inc. will decrease to 4.9x and 4.5x at the 2016 fiscal year-end. Rent adjusted leverage is

projected at 6.3x at fiscal year-end 2016, or 6.1x after $198 million in projected cash balances.

The Propco II 8.5% Senior Secured Notes due ’17 have a 1st lien on 123 real estate properties, the master

lease with Toys “R” Us-Delaware, Inc. and all other leases and contract rights, but the Propco II 8.5%

Senior Secured Notes due ’17 are neither guaranteed by Toys “R” Us-Delaware, Inc., nor by Toys “R”

Us, Inc. Propco II sits as a bankruptcy remote subsidiary of Toys “R” Us-Delaware, Inc. As our proxy

for purposes of valuation for the Propco II 8.5% Senior Secured Notes, we utilize an above market 9%

cap rate and discount Propco II’s LTM operating income by 27% (this is just the discount that gets us to a

$725 million valuation) to adjust for above market lease rates. RWP’s valuation is approximately equal

to the $725 million face value of the 8.5% Senior Secured Notes due ’17.

We have increased our Toys “R” Us, Inc. 2016 Adjusted EBITDA estimates from $826 million to $854

million and introduce our 2017 Adjusted EBITDA estimate at $897 million. Expectation for the

Company’s continued effective implementation of its cost savings program, international

property/licensee expansion, assumed 3% Canadian and modest international same store sales growth,

stable gross margins and our assumption that FX translation will stabilize in 2016 and not act as a

continued headwind are all key drivers for our 2016 and 2017 P&L and cash flow model projections. We

also project that Toys “R” U - Delaware, Inc. will grow its Adjusted EBITDA to $484 million and $493

4


million during the next two years. We believe that the greatest risk to the accuracy of our earnings

projections is unexpected consumer weakness and/or the strengthening of the US$.

Credit metrics are projected to continue to improve in 2016 and 2017 as a result of growing Adjusted

EBITDA and free cash flow that is projected to reduce debt. Our model forecasts that net debt will

decrease from approximately $4.074B at year end 2015 to $3.924B at year end 2016 and decrease further

to $3.743B at year end 2017. Our projections would result in a reduction in net leverage from 5.1x in

2015 to 4.6x at year end 2016 and 4.2x at year end 2017.

Liquidity is projected to improve further in each of the next two years. Our model indicates that Toys-

Delaware, Inc. will also begin to build up its cash balances in 2017. We target year end domestic ABL

availability of $964 million in 2016 and 2017. Including cash, total liquidity is projected at $1,657

million at year 2016 and $1,791 million at year end 2017.

5


Toys "R" Us, Inc.

"Hold Co."

Toys "R" Us

Europe, LLC.

Toys "R" Us (UK) Ltd.

Toys "R" Us Properties (UK)

(indirect, wholly -owned subsidiary)

$375M UK RE facility due 7/7/20

Toys "R" Us

Real Estate Finance SAS

$50M French Prop. Co. Facility

due 2/27/18

Toys "R" Us Ibeira

Real Estate S.L.V

(no borrowings @ 1/30/16)

Toys "R" Us

Delaware, Inc.

$80M 1st Lien ABL due 3/21/19 guaranteed by Delaware subsidaries

$223M FIho Loans-1st lien due 10/24/19 same

guarantors as for ABL

$136M B-2 2nd lien ABL due 5/25/18 1st lien IP

$65M B-3 2nd lien ABL due 5/25/18 1st lien IP

$1,002M B-4 2nd lien ABL due 5/25/18 1st lien IP

$184M Finance & capital lease obligations

$22M 8.75% Debentures' guaranteed by Hold Co.

Toys "R" Us Property Company II LLC.

(Unrestricted, non-guarantor subsidiary)

$725M Sr. Secured Notes 8.5% due

12/1/17

Wayne Real Estate LLC

Toys "R" Us Property Company I , LLC.

$923M Sr. Unsecured Term Loan due 8/21/19

TRU Asia, LLC.Toys "R" Us

Japan, Ltd.

$49M Bank Loan due 2/26/21

$450M FV 103/8 due 2017

$400M FV 73/8 due 2018


Corporate Organization Chart (with outstanding debt balances as of 1/30/16)

Issuer Issuer

Issuer

Issuer

Issuer

Issuer

6


Toys “R” Us-Delaware, Inc. Ch.11 Bankruptcy Summary & Liquidation Analysis

+ Our CH.7 liquidation model calculates a 1.66x coverage of the B-2, B-3 and B-4 T/Ls. The analysis

that supports our conclusion assumes a Toys “R” Us-Delaware liquidation with a 363 sale of its Canada

operations at a 5.5x multiple. We assume the scenario of a liquidation combined with a 363 sale is the

appropriate analysis because it meets the Best Interests test, which is by definition lower than a Ch.11

valuation.

+ Our CH.7 liquidation model also calculates that unsecured claims could receive 33% of the value of

their claim with equity interests not having any residual value. We believe that in a CH.7, the B-2, B-3

and B-4 T/Ls would be oversecured as noted above. After approximately $350 million in priority

administrative claims, unsecured creditors could receive 33% of their claims. Value for Delaware equity

interests would likely have no residual value, yet value for the Holdco unsecured noteholders could be

approximately $118 million provided from 33% of the value of outstanding $364 million in short term

borrowings from “Parent” as shown on Delaware’s balance sheet at 1/30/16. We assume that in our low

case recovery model for the Holdco Notes.

+ Our CH. 11 valuation results in a 98% unsecured claim recovery with no residual value for equity

interests. Our analysis utilizes a 5.0x multiple for domestic and Canada operations, which we believe is

the correct multiple for determining the Toys “R” Us-Delaware, Inc. CH.11bankruptcy estate value. This

is based on comparable retail valuations that are widely known and understood.

+ Our CH.7 liquidation waterfall reviewed as follows: In the first table below our summary, we have

utilized capital letters (e.g., (A)) to denote that further detail is provided in the second table below.

Treatment of Cash:

There was $38 million of cash as of 1/30/16.

Treatment of Unrelated Party license fees:

We add the value of annual unrelated party license fees that were $17 million during 2015 at a 6x

multiple to arrive at a $102 million valuation for the income stream. An argument could easily be made

that a 9.0x or a 10.0x multiple could be utilized, but that is not necessary for our ultimate conclusions that

there is ample 1.66x coverage for the term loans after liquidation of the ABL and the Tranche A-1 US$

and C$ borrowings. Also, utilizing this assumption does not change our conclusion that there would be

no residual value for the Holdco equity interests under absolute priority of claims because our waterfall

calculates that not all unsecured note claims would be paid.

Treatment of Related Party license fees:

We do not give value to the $68 million of annual (for 2015) foreign affiliate license fees notwithstanding

that there is a strong business and legal argument to be made that Delaware would continue to receive

those payments. It is logical to assume that Delaware as DIP would not reject any executory contract

under which the debtor is a licensor of a right to intellectual property and receives significant income.

Should Delaware reject such an executory contract for intellectual property, then a (affiliate or other)

licensee would nonetheless retain its rights, at its option, (including exclusivity provisions) for the

duration of the contract including extension periods. The licensee (affiliate or other) does also have the

option to treat such contract as terminated by such Delaware rejection.

Former management had indicated to us that the trademarks are important to its international operations

and that keeping its Toys “R” Us and Babies “R” Us names intact in international markets is needed.

Notwithstanding that the value of the foreign affiliate license fee income stream could potentially add

$600 million or more of value to the Delaware bankruptcy estate, we have made the more conservative

assumption that if foreign affiliates were to enter into bankruptcy themselves, then they would likely

7


renegotiate the contract to lower royalty payments to Delaware, or to treat such contract as terminated

should Delaware reject the contract. Keeping the existing terms of the contract would be at the affiliate

licensees’ option should it, too, file for bankruptcy.

Value of ABL collateral:

We have elaborated on our liquidation assumptions in section “B”. We assume an 85% liquidation value

for the accounts receivable and a 65% liquidation value for domestic and Canadian inventories, which

more than liquidates the outstanding ABL balance and L/Cs plus US$ and C$ Tranche A-1 balances. We

assume no additional value for the Canadian Real Estate that also collateralizes the Tranche A-1 C$

Borrowings. (Any potential value is included in our “value of unencumbered Delaware Property” found

below.) Residual value is available for the B-2, B-3 and B-4 term loans that have a 2nd

lien on the

collateral.

We assume a 363 sale for Canadian operations:

We assume that the Canadian operations could be sold for 5.5x LTM EBITDA of $71 million, which is

EBITDA before corporate costs in a 363 sale (as opposed to a 5.0x valuation in CH.11). (We assume that

Canada rejects its license to remain consistent with our treatment of related party license fees. Should we

assume that Canadian LTM EBITDA after intercompany fees of approximately $56 million, then our

Canadian operations value would decrease, yet be more than offset by recoveries for related party license

fees because of the higher multiple applied to the license fee income stream.) The 65% 1st priority pledge

reduces the residual value available for the Term B-2, B-3 and B-4 loans from $391 million to $254

million as shown in our waterfall.

Value of unencumbered Delaware property:

We estimate that the dark value of the 111 Delaware owned retail stores (100 of which are subject to

ground leases) is approximately $200 million that is based on our estimate for average store size at 45,000

and a dark value of $40/square foot. We believe that this is supportable based on current bank loans to

other retailers that are secured by retail stores and that utilize a dark valuation. The B-4 TL does have a

$150 million future lien on unencumbered Delaware property. We ascribe no value to leasehold interests

in our calculations.

8


9


10


Toys “R” Us, Inc. Ch.11 Bankruptcy Summary and Holdco Senior Note CH.11 Valuation

+ We calculated a wide range of valuations for the Holdco Senior Notes. We include a $581 million

unsecured claim from Delaware to arrive at total unsecured claims at Holdco of $1,453 million. We note

that this calculation assumes that all notes payable by Holdco have been fully disclosed, including any

that may be notes payable to Toys “R’ Us (UK) Limited to arrive at the net UK receivable. Our

calculation is in the “Parent Senior Unsecured Note Payable to Delaware @ 1/30/16” calculation in the

immediately table above.

+ International subsidiary guarantees are likely an important component of an exchange for both the

10 3/8% Holdco Senior Notes due ’17 and its 7 3/8% Holdco Senior Notes due ’18. We believe that

there is sufficient cash at Holdco subsidiaries to partially reduce the face value of the Toys ”R” Us, Inc.

10 3/8% Holdco Senior Notes due ’17 and its 7 3/8% Holdco Senior Notes due ’18 in an exchange or

refinancing. In addition, we believe that the international subsidiaries of Toys “R” Us, Inc. are solvent

and some may offer the flexibility to provide new Holdco Notes with senior guarantees subject to local

bankruptcy laws and required bank amendments. We expect that solvency opinions are required to be

obtained from local counsel and would be needed as part of the process to insure against future potential

fraudulent conveyance claims should a guaranteeing subsidiary file bankruptcy. Legal opinions and

necessary amendments to existing local debt agreements to provide for subsidiary guarantees likely take

time and are a potential reason for what may be viewed as a slow process by investors on the outside.

Contingent subsidiary obligations are probability weighted for default at the time a guarantee is made and

are potentially more defensible against future fraudulent conveyance actions than actual debt raised by a

subsidiary with proceeds upstreamed to the parent. The United States Bankruptcy Code requires

reasonable equivalent value to have been received in exchange for the guarantee in addition to the

subsidiary providing the guarantee to be deemed solvent at that time. Fraudulent conveyance laws are

specific to each country, and, therefore, to each possible Toys “R” Us, Inc. subsidiary guarantor.

Nonetheless, we utilize The United States Bankruptcy Code as the standard and launching point for

consideration regarding a possible exchange that would receive value from a Toys “R” Us, Inc.

subsidiary, international or otherwise. The solvency argument for the Company (yet not necessarily for

the specific guarantor subsidiary which is critical for actions brought by subsidiary claimants) is further

reinforced by Holdco Notes trading levels immediately prior to and after an exchange or refinancing

utilizing subsidiary guarantees. For this reason, we believe that equity owners are incentivized to insure

that any new notes do not trade poorly after completion of an exchange or refinancing. Also, should only

the 10 3/8s be exchanged or refinanced - and the 7 3/8s are not exchanged/refinanced simultaneously with

immediate loss of market value subsequent to a 10 3/8s exchange - then this market outcome could

possibly lend support to a future fraudulent conveyance action with consideration that the corporation and

its subsidiaries may be deemed insolvent as a result of such transfer (i.e., the guarantees).

We would expect, that for the reasons that we have outlined, a simultaneous exchange of both the 10 3/8s

and the 7 3/8s is likely in the best interests of both debt and equity holders. We also point out that should

there be an exchange, then Holdco Note holders would best be suited to structure a “face value exchange”

to retain their full claims should a future bankruptcy occur.

11


+ RWP’s low and high Holdco Senior Note valuation case both utilize a 5.0x multiple for a CH.11

filing. We outline the difference between the two cases.

High valuation case:

We assume that the IP executor contract with Delaware is rejected, which leaves more value for the

international subsidiaries.

We also assume that the Delaware unsecured payable of $364 million and the $101 million of Delaware

taxes payable to Holdco are valued at 100% of the unsecured claim.

We assume that the $176 million UK subsidiary payable is received by Holdco.

Low valuation case:

We assume that the IP executor contract with Delaware is not rejected.

We also assume that the Delaware unsecured payable of $364 million and the $101 million of Delaware

taxes payable to Holdco are valued at 33 cents on the dollar as outlined in the Delaware liquidation

analysis reviewed above.

We assume that the $176 million UK subsidiary payable is not received by Holdco.

12


13


Toys “R” Us Property Company II, LLC Historical Financials and Expectations

Propco II’s 2015 total revenues were $118.4 million with operating income and EBITDA at $88.8 million

and $100.3 million, respectively. Revenue and EBITDA generation has remained consistent. Propco II

owns 124 retail stores, of which 11 are subject to a ground lease. These retail stores account for

approximately 14% of the Company’s 866 domestic stores and are leased to Delaware through a Master

Lease Agreement that secures the 8 ½% Senior Secured Notes due ‘17. In a prior 10-K, the Company had

estimated that the retail locations owned by PropcoII were collectively responsible for approximately

$1.0B of Delaware’s approximately $7.4B in annual domestic sales.

Propco II generates excess cash notwithstanding that it makes distributions to its parent, Toys “R” Us-

Delaware, Inc. Cash distributions are subject to The Limitation of Restricted Payments test that requires

that Restricted Payments shall not exceed the sum of:

(1) 50% of Cumulative Free Cash Flow beginning January 2010;

(2) 100% of Equity Proceeds;

(3) if any Investment made after 11/20/09 is sold for cash, then the lesser of (i) the amount of the initial

investment; (ii) net Fair Market Value of return of capital less the cost of disposition; and,

(4) Declined Offer Proceeds.

At year end, PropcoII had $91.4 million of cash on its balance sheet Cash balances grew $25 million

from $66.4 million at 1/31/15 to $91.4 million at 1/30/16 and is expected to jump by a similar amount in

the upcoming fiscal year end 1/28/17. At this time, we believe that the Restricted payments basket has

limited availability to upstream dividends.

Propco II 8.5% Senior Secured Notes due 12/17 face value is $725 million. (The Notes are not

guaranteed by Toys “R” Us- Delaware nor by Toys “R” Us, Inc. Propco II does not provide any upstream

guarantees.) A continued cash build would reduce the net proceeds required to refinance the 8.5s at or

prior to its December 1, 2017 maturity.

Certain assumptions indicate that a refinancing may be feasible. First (as shown in the table below), we

discount the LTM operating income stream by 27% to account for above market leases. Second, we

utilize a 9% cap rate to apply to the discounted lease stream notwithstanding that market cap rates are

estimated to be closer to 8.5% for “C” quality retail properties. Utilizing an 8.5% cap rate would indicate

even greater coverage. The combination of a 27% (our subjective number to more than reflect the above

market lease rates) and a 9% market cap rate results in a $725 million net lease stream value for the 123

properties. Net of $91.4 million of cash, there is an approximate $634 million refinancing requirement.

14


15


16


Toys “R” Us-Delaware, Inc. P&L Projections

We estimate that Delaware could generate 1Q16 Adjusted EBITDA of $45 million, which would be a

15.7% y-o-y increase as compared to $39 million in 1Q15. Our full year Adjusted EBITDA is expected

at $484 million, which would be a 9.7% y-o-y increase as compared to $441 million in 2015. Our model

assumes a flat 4Q16 Adjusted EBITDA at $360 million as compared to the same in 4Q15.

Our Toys “R” Us-Delaware, Inc. quarterly model for 2016 and full year 2017 assumes 0% domestic comp

store sales growth and 3% Canada growth. No new stores are assumed added and net stores remain

constant through our two year projection period. A decrease in the average number of stores both

domestically and in Canada is estimated to have a slight drag on first half operating results. We expect

1Q16 total revenues to decrease (0.9%) to $1,646 million and increase 0.3% for full year 2016 to $8,270

million.

Gross margins are expected to remain flat with continued cost efficiencies and benefits offset by ongoing

competitive pressures and additional omni-channel delivery costs as that sales channel expands as a

percentage of net sales. Gross Profit is estimated to decrease by (0.8%) to $604 million in 1Q16 and

decrease again in2Q16 before improving on a y-o-y basis with a full year 2016 increase of 0.3% to $2,900

million. We expect that the management budget would show a more robust improvement, but we utilize a

credit model to focus more on the downside.

We expect that SG&A continues to offer future savings, yet we do not believe that we are aggressive with

our estimates. In 2015, excluding the impact of FX translation, SG&A decreased $171 million due to a

$90 million decrease in payroll expense, which includes a $57 million decline in store payroll, and a $38

million decrease in advertising and promotional expenses. There was also a $16 million reduction in

occupancy costs in 2015 as a result in domestic store closures. We assume some modest y-o-y decreases

in each of the four 2016 quarters with Fit for Growth savings weighted to the front end of the year that we

project could result in full year SG&A expense savings of $48 million. Full year 2016 SG&A is

projected at $2,565 million as compared to $2,614 million recorded in 2015. Further expected lease

expense reductions in 2016 are expected to offset wage and benefit increases. We assume that SG&A

expenses grow 2.5% in 2017, which may be too conservative of an assumption.

Other income is expected to increase y-o-y beginning in 2Q16 primarily as a result of greater credit card

program income, some gift card breakage income and modest growth in ad income from Toys websites.

Toys “R” Us-Delaware, Inc. Cash Flow Projections

Our model assumes that with the help of improved operations, some modestly more favorable deferred

income tax and working capital assumptions that Delaware generates $153 million of free cash flow in

2016 and $166 million in 2017. This will allow the Company to eliminate its $80 million ABL balance at

year-end 2016 and build up cash over the two year period. Capital expenditures are assumed to remain at

$153 million in 2016 and 2017, which was Delaware’s capex in 2015.

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Toys “R” Us-Delaware, Inc. Projected Credit Metrics

Coverage of rent and interest expense is estimated to improve from 1.2x in 2015 to 1.3x in 2016 and

2017. Fixed charge coverage after capital expenditures is projected to improve from 1.0x in 2015 to 1.1x

in each of 2016 and 2017. Peak third quarter leverage is targeted at 6.5x, or 6.1x after cash balances.

This would be a notable improvement as compared to 8.1x, or 7.8x after cash balances. At year end 2016,

we believe that total leverage could decrease to 4.9x, or 4.5x net of cash from 5.6x, or 5.3x net of cash at

year-end 2015. We expect leverage to further decrease at Delaware to 4.8x at year-end 2017, or 4.1x net

of cash.

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Toys “R” Us, Inc. Consolidated P&L Projections

We estimate that Toys “R” Us, Inc. 1Q16 Adjusted EBITDA could be $89 million, which would be a

27.0% y-o-y increase as compared to $70 million in 1Q15. Our full year Adjusted EBITDA is expected

at $854 million, which would be a 6.7% y-o-y increase as compared to $800 million in 2015. Our model

assumes a flat 4Q16 Adjusted EBITDA at $573 million as compared to the same in 4Q15, with

improvements in the first three quarters as a result of modest gross profit growth and SG&A cost savings.

Our Toys “R” Us, Inc. quarterly model for 2016 and full year 2017 assumes 0% domestic comp store

sales growth and approximately 1.4% international same store sales growth, which includes 3% same

stores sales growth in Canada. No net additional domestic or Canadian retail stores are assumed;

however, international operated stores are modeled to grow from 756 to 776 in 2016 and by another 20

stores to 796 in 2017. Also, our projections assume that the number of international licensed stores will

increase from 252 at year-end 2015 to 275 at year-end 2016 and to 300 at year-end 2017. Our P&L

projections are FX neutral.

1Q16 net sales are estimated to increase 0.4% to $2,335 million from $2,325 million recorded in 1Q15

and then increase 1.3% for full year 2016 to $11,950 million from $11,802 million in 2015.

Gross margins are expected to remain within 10bp of 2015 levels during each quarter and full year 2016

gross margins are projected at 35.90% as compared to 35.81% for 2015. We expect that there may be

some expense leverage at the COGS line for the consolidated company. Consolidated gross profit is

estimated to increase by 0.5% to $867 million in 1Q16 and then begin to improve on a y-o-y basis with a

full year 2016 increase of 1.5% to $4,290 million as compared to $4,226 million in 2015. We believe that

US$ weakness during 1Q16 could add to Toys “R” Us, Inc. gross profit though we have assumed no

benefit from FX translation in our model.

Consolidated SG&A expense is expected to decrease in the first two quarters and then begin to flatten out

in the second half of 2016. Full year 2016 SG&A is projected at $3,558 million as compared to $3,593

million recorded in 2015. We project that SG&A expenses grow 2.2% in 2017.

Toys “R” Us, Inc. Consolidated Cash Flow Projections

Our model assumes that the Company generates $147 million of free cash flow in 2016 and $189 million

in 2017, which assumes $250 million in cash capital expenditures. This will allow the Company to

eliminate its $80 million domestic ABL balance that was outstanding at year-end 2015 and assumes a $40

million reduction in Propco I debt balances during each of 2016 and 2017. Total Company debt

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decreases from $4,754 million at year-end 2015 to $4,618 million at year-end 2016 and $4,566 million at

year-end 2017. Cash is expected to build from $680 million at year-end 2015 to $693 million at year-end

2016 and $827 million at year-end 2017, which would increase liquidity and drive net debt balances down

further.

Toys “R” Us, Inc. Consolidated Projected Credit Metrics

Toys “R” Us, Inc. coverage of rent and interest expense is estimated to improve from 1.4x in 2015 and

2016 to 1.5x in 2017. Coverage of rent and interest expense after capital expenditures is projected to

remain at 1.2x through 2017. Peak third quarter leverage is targeted at 6.4x, or 5.9x after cash balances.

This would be a notable improvement as compared to 7.5x, or 7.0x after cash balances at the end of

3Q15. At year end 2016, we believe that total leverage could decrease to 5.4x, or 4.6x, net of $693

million of projected cash. Total and net leverage was 5.9x and 5.1x, net of $680 million in cash at year-

end 2015. We expect total and net leverage to further decrease to 5.1x at year-end 2017, or 4.2x net of

$827 million of cash.

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Statement of Risk Toys “R” Us, Inc. and its subsidiaries operate with significant financial and operating leverage and has

experienced declining comparable store sales and margin pressure during the last several years. The

Company’s earnings and free cash flow are at risk for further meaningful strengthening of the US$

beyond what we have assumed in our model, which is for stable currency rates. Toys could require

external funding, which would increase its already high financial leverage and limit its ability to meet its

debt service obligations from its operational cash flow generation. External funding could increase

claims in the event of bankruptcy and dilute existing secured and unsecured claims. Further, competition

from Amazon, Walmart, department stores, discount retailers, pharmacies and others will remain keen

and require ongoing vendor confidence and support. Toys “R” Us, Inc. debt securities may become

illiquid because of its high leverage, changes or perceived changes in its financial condition.

Disclosure Appendix

Explanation of Rating Recommendations:

BUY RECOMMENDATION – For paying bonds and equities, we consider that the potential total return, from capital

appreciation, yield, or both, will be greater than that of comparable indices or benchmarks. For defaulted / distressed securities,

we consider the potential total return attractive relative to the possible downside risk.

SPECULATIVE BUY RECOMMENDATION – A Speculative Buy Recommendation differs from a Buy Recommendation in

that it carries the highest level of risk and is only suitable for investors that can withstand significant capital losses if events or

circumstances differ from our expectations.

MARKET PERFORM RECOMMENDATION – For paying bonds and equities, we consider that the potential total return,

from capital appreciation, yield, or both, will match that of comparable indices or benchmarks. For defaulted / distressed

securities, we consider the security fairly valued based on the potential total return relative to the possible downside risk.

SELL RECOMMENDATION – For paying bonds and equities, we consider that the potential total return, from capital

appreciation/loss and yield, or both, will be lower than that of comparable indices or benchmarks. For defaulted / distressed

securities, we consider the security overvalued based on the potential total return relative to the possible downside risk.

NEUTRAL – After careful examination, we either do not have a strong opinion as to the potential return of a security or we

consider that there is no reasonably quantifiable basis for estimating the potential return with any degree of certainty.

We generally consider the time horizon for Recommendations to be six to twelve months, though the analyst may specify

a particular and possibly different time horizon when instituting his or her rating. Our rating recommendations may not

directly address risk, but the analyst may, in the pertinent report, qualify his or her recommendation with comments

regarding risk. All Recommendations are subject to investors’ own portfolio guidelines. R.W. Pressprich is under no

obligation to prepare successive reports regarding a subject issuer.

PROFILE/COMMENTS - Separately from our rating methodology, we may issue RWP Profiles\Comments which do not

rate a security but provide background information or comments on certain issuers or events.

The following is our Fixed Income Distribution Table as of April 15, 2016.

Fixed Income Recommendations

Buy Speculative Buy Mkt. Perform Sell Neutral Total

# of Current Ratings 26 2 4 1 3 36

% Current Total 72% 6% 11% 3% 8% 100%

The following is our Equity Rating Distribution Table as of April 15, 2016. Please note that our “Corporate Re-Org Equity”

reports may not contain recommendations and are not included in the following table. “Corporate Re-Org Equity” reports often

elaborate on various valuation methodologies, letting the reader decide upon the most appropriate methodology for their

investment decision.

Analyst Certification: I certify that the views expressed in this report accurately reflect my personal views about the subject

companies and their securities, and that no part of my compensation was, is, or will be directly or indirectly related to the

specific recommendation(s) or view(s) in this report.

Steven Ruggiero, CFA

Head of Research April 22, 2016

Equity Recommendations

Buy Speculative Buy Mkt. Perform Sell Neutral Total

# of Current Ratings 7 0 0 0 3 10

% Current Total 70% 0% 0% 0% 30% 100%

a n i n d e p e n d e n t v i e w

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