$5+Billion in CMBS Exposed to Toys R Us Bankruptcy

More than $5 billion in commercial mortgage-backed securities loans have exposure to Toys R Us–which filed for bankruptcy Monday–as a tenant, CMBS analysts say.

Toys R Us, Wayne, N.J., filed for Chapter 11 bankruptcy in Richmond, Va., seeking to reorganize its business. The firm said it holds $5 billion in debt.

“Like so many other retailers that are grappling with a significant amount of debt, Toys R Us formally filed for Chapter 11 bankruptcy protection on September 18 in an attempt to resolve roughly $400 million in debt that will mature by 2018,” said Trepp Analyst Catherine Liu. She noted CMBS loans approaching $5.5 billion could be affected by the firm’s bankruptcy filing.

Liu noted Toys R Us racked up “significant” debt in recent years and said online competitors continue to cut into the market share of its critical Babies R Us business line.

“While Toys R Us has indicated that the majority of its stores remain profitable and that the bankruptcy filing will not affect its current nationwide operations, it is likely the retailer will be reviewing its current brick-and-mortar footprint during the bankruptcy process,” Liu said.

Toys R Us Chairman and CEO David Brandon made it clear that “streamlining” the chain’s store base will be part of its restructuring. He said the company is currently “identifying underperforming stores and above-market leases as part of an overall strategy to reduce and optimize their existing store footprint,” and said it plans to close underperforming stores and renegotiate lease terms of other stores to reduce rent to current market terms.

Wells Fargo Securities, Charlotte, N.C., found 96 commercial mortgage-backed securities loans with exposure to Toys R Us as a tenant. “In dollar-value terms, loans summing to $5.37 billion have some exposure to Toys R Us, but we believe it’s more meaningful to adjust the loan balance for the percentage of gross leasable area occupied by the tenant,” the report said. “We also took into account cases where only certain properties in a portfolio loan have exposure. With these adjustments, the dollar volume exposure across CMBS to Toys R US amounts to $1.08 billion.”

Trepp cast a wider net for its analysis by searching for any CMBS loans that included Toys R Us or sister company Babies R Us as one of the five largest tenants. It found 109 outstanding loans totaling nearly $5.5 billion that currently carry Toys R Us or Babies R Us exposure. Many are CMBS 2.0 and 3.0 notes issued after 2010.

Backed by 123 Toys R Us and Babies R Us stores, the $404.7 million Toys R Us portfolio is the loan with the largest CMBS exposure, Liu said. The loan–the only one behind the single-asset/single-borrower TRU 2016-TOYS transaction–includes a $102.4 million freely payable portion. The 123 collateral properties span a combined five million square feet in 29 states, Trepp calculated. It noted the loan, which amortizes on a 30-year schedule, included “relatively conservative” underwriting metrics. When securitized in 2016, the debt service coverage ratio and loan-to-value ratio registered 1.85x and 58.3 percent, respectively.

Other major CMBS loans with heavy exposure to the retailer include the $380 million Bronx Terminal Market loan and the $123 million The Plant San Jose note, Trepp said.

Despite its bankruptcy filing, Toys R Us announced yesterday it will hire more than 12,000 part-time workers for the holidays.