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Credit First Service Union Moody's Investors Service downgraded the long term senior unsecured debt rating and the short-term rating of Toys "R" Us, Inc. The rating outlook remains negative.Visit our AXcess News Forum and add your comments on this story. Try your hand at writing, the best story will be published on our news network. Take our market poll too!

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Card Credit Discover Service March 24, 2004 (AXcess News) New York - Moody's Investors Service downgraded the long term senior unsecured debt rating and the short-term rating of Toys "R" Us, Inc. (Toys) to Ba2 and Not Prime respectively, and assigned a senior implied rating of Ba1 and a Speculative Grade Liquidity Rating of SGL-1. The rating outlook remains negative. These rating actions conclude the review for possible downgrade initiated on January 9, 2004.

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Credit Security Service Union Senior implied at Ba1

Credit Report Service Senior unsecured issuer rating at Ba2

Blogspot Com Christian Speculative Grade Liquidity Rating at SGL-1The downgrade results from continued sub-par performance of the US Toy division, driven to a major extent by increasing competition from discounters such as Wal-Mart and Target, especially during the all-important Christmas Holiday season. The success of the discounters during the 2003 holiday period increases the pressure on Toys to reduce its reliance on this relatively short selling season, which it has to a large extent failed to accomplish. For the first nine months of 2003, Toys posted weaker performance than in the same 2002 period on a reported basis, exacerbated by a very soft third quarter. This poor performance is magnified when viewed in the context of the extensive and expensive remodeling program undertaken to convert the stores to the Mission Possible format, with requisite negative impact on return on investment. Moody's believes that Toys will be challenged to improve its operating performance in light of the competitive environment it faces, to modify the seasonality of its cash flows, and to significantly improve its return on investment.

Christian Counseling Credit The Ba1 senior implied rating considers Toys' position as the premier specialty toy retailer, with a solid number two position in the US market, its nationwide footprint, the strong performance and growth potential of its Babies "R" Us, and to a lesser extent, International divisions, ample liquidity, a sizable pool of unencumbered assets, and debt protection measures that provide significant cushion for this rating category. The rating is restrained by the potential negative impact on debt protection measures and Toys' franchise of ever-increasing competition from discounters, driven both by lower prices and pure square footage growth. Moody's noted that, despite the intense competition from the discounters, Toys has stabilized its market share, indicating it is effectively competing against other specialty toy retailers, and is not thus far losing overall share to the discounters despite the fierce holiday pricing environment and its impact on sales and earnings. Toys' liquidity is solid, with a year-end cash balance of $2 billion. Cash-on-hand has been reduced due to the February 13 pay-off of a $506 million Eurobond; it will, however, increase by $197 million upon closing of the sale of 124 Kids "R" Us locations to Office Depot.

Credit Federal Service Union The negative outlook remains due to uncertainty with respect to the potential impact on bondholders of the recently-announced comprehensive strategic review of all facets of Toys' business which could have a negative impact on the company's credit profile, as well as the potential for further erosion of its core US franchise. The rating could be lowered if the weak performance of the U.S. toy division continues or if the strategic review results in unreasonable charges. Prospectively, the outlook could be stabilized and the rating upgraded over the longer term if Toys is able to regain its momentum in the US, continue to profitably expand Babies "R" Us, maintain a conservative financial policy, and at least maintain the status quo with the international and Toysrus.com divisions.

Credit Monitoring Service The Ba2 senior unsecured debt and issuer ratings reflect the structural subordination of senior unsecured obligations to Toy's unrated bank facility. While the bank facility is guaranteed by Toys "R" Us- Delaware, Inc., the senior unsecured debentures and other senior unsecured obligations at the parent company do not benefit from these guarantees.

Credit Division Service The SGL-1 speculative grade liquidity rating reflects Toys' $1.5 billion cash position, which should enable it to self-fund its peak working capital needs over the next twelve months, its ability to generate significant levels of free cash flow, and the additional comfort of its undrawn $685 million unsecured bank credit facility maturing in September 2006. While the credit facility is unsecured, in the event that the banks obtained security in assets other than inventory, pre-existing debtholders would under the terms of the indenture also receive collateral on a pari passu basis, which could limit future financial flexibility to some extent.Toys "R" Us, headquartered in Wayne, New Jersey, is the largest specialty retailer of toys, with FYE 2004 revenues of $11.6 billion. It operates stores both in the U.S. and internationally, as well as the Babies "R" Us format. In addition, it sells online via the toysrus.com website which is operated in partnership with Amazon.com.

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