AN AutoNation Inc

Toys "R" Us Inc. is getting some needed relief on much of its $850 million debt load coming due in the next two years, alleviating investor concerns about the company's ability to meet its next deadlines for repaying debt.

Under a refinancing agreement announced Tuesday, holders of bonds maturing in 2017 and 2018 will swap their holdings for new debt that will mature in 2021 and be secured by a newly formed entity.

Holders of just over half of $850 million in bonds due in 2017 and 2018, including mutual-fund manager Loomis, Sayles & Co. and hedge-fund firms such as Brigade Capital Management LP, agreed to support the transaction, according to a regulatory filing.

The company began restructuring talks with those creditors earlier this year and all of the creditors party to those talks have agreed to the new terms, according to people familiar with the matter, suggesting that the level of participation could grow further. The company is seeking to swap up to 89% of those current bonds for those with the longer maturity.

The private-equity-backed retailer has been grappling with a hefty debt load it took on when the company was taken private in a 2005 leveraged buyout by Bain Capital LLC, KKR & Co. and Vornado Realty Trust. That deal left the retailer with roughly $5.4 billion in debt. The company has been trying to get the deal done at a time when the refinancing market is weak.

Chief Executive David Brandon said the refinancing will free up the company to focus on improving its store operations and developing its online business, where it is in the midst of bringing the operations in house. The toy retailer is focusing on trying to shore up its in stock levels and is testing using parts of its stores for events, like birthday parties.

"We can become operators again full time," Mr. Brandon said in an interview, after spending a lot of time working on the refinancing.

Toys "R" Us's debt rallied on the announcement. Its bonds bearing 10.375% due next year, set to be refinanced in the deal, rose 7 points to par, according to MarketAxess. Those bonds traded as low as 70 cents on the dollar in mid-December.

Alongside the restructuring announcement, the company announced a 13% increase to $79 million in adjusted earnings before interest, taxes, depreciation and amortization for the quarter ending April 30 compared with the same period last year.

Sales at existing stores also improved in the period, rising 0.9%, during a time of choppy retail results as retailers continued to struggle with changing consumer shopping habits. "Within the context of the world around us, we felt pretty good that we were able to come in at slightly above flat," Mr. Brandon said.

Improving operations will help put the company in better shape for an eventual initial public offering and allow longtime backers a path to exit. "It put us in a position where IPOs are a viable option to consider," Mr. Brandon said. He declined to comment on a timeline for such an event.

Toys "R" Us had hoped to complete a deal to addresses these maturities by the end of April. But the deadline slipped as the bondholders proposed that the company mortgage its lucrative European operations.

As part of the agreement announced Tuesday, Toys "R" Us will form a new subsidiary, holding the equity of its European, Japanese and Australian operations and will capitalize that company with $100 million in cash.

The bond exchange will swap 2017 bonds, dollar-for-dollar, for new 12% bonds maturing in 2021 that are secured by the newly formed subsidiary and other European assets. The company is also willing to spend up to $150 million to allow 2017 bondholders an option of cash and new bonds. The holders of 2018 bonds can exchange their bond debt for these new bonds at 90 cents on the dollar.

Toys "R" Us is capping the exchange at $525 million in newly issued bonds. A third party has also agreed to purchase an additional $50 million of the bonds to help capitalize the new subsidiary.

Bain and KKR have spent more than a decade trying to resuscitate Toys "R" Us, which once was lauded as a "category killer" but has since struggled with an onslaught of competition from online sellers and big-box discounters.

In 2014, Toys "R" Us hired Michael Short, who helped lead AutoNation Inc.'s turnaround after the financial crisis, to serve as its chief financial officer. It also tapped Chetan Bhandari, a former leveraged-finance banker at Goldman Sachs Group Inc. and former restructuring adviser at boutique bank GLC Advisors & Co., to be its treasurer.

Write to Stephanie Gleason at stephanie.gleason@wsj.com and Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

June 14, 2016 16:15 ET (20:15 GMT)

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