How $5 billion of debt caught up with Toys 'R' Us
20/09/2017 06:00
By Jessica DiNapoli and Tracy Rucinski
Sept 20 (Reuters) - Toys "R" Us Inc has been making $400
million in interest payments on its debt every year, largely due
to its $6.6 billion leveraged buyout in 2005. This week, it
succumbed to its debt burden, leading to the biggest bankruptcy
of a U.S. retailer since that of Kmart in 2004.
The largest U.S. toy retailer's decision to file for Chapter
11 bankruptcy protection on Monday took investors by surprise,
given that the company faced no imminent debt maturities and had
managed to overcome financial stress in the past by securing
concessions from its creditors.
But company's ability to kick the can down the road had been
exhausted. The bankruptcy filing was the culmination of an
unsuccessful seven-month effort by Toys "R" Us to find relief
from its $5.2 billion debt pile, according to bankruptcy court
filings and people familiar with the deliberations.
The advisers that Toys "R" Us hired to fix its capital
structure explored at least two deals with some of its creditors
to raise money that would have helped the company stave off
bankruptcy before the key holiday shopping season, avoiding a
supply chain disruption stemming from vendor fears about
repayment, a bankruptcy filing shows.
The Wayne, New Jersey-based company's creditors'
unwillingness to show any more leniency underscores the lack of
confidence by investors in the troubled brick-and-mortar retail
sector, which has been pummeled by the rise of e-commerce
companies such as Amazon.com Inc AMZN.O .
Toys "R" Us was looking to raise at least $200 million to
make it to January, at which point it could work on fixing its
entire capital structure, according to court filings. Over the
years, Toys "R" Us had been able to win other short-term fixes
from creditors, even as its financial performance deteriorated.
Once the company realized that it could not secure financing
to get through the holiday season, the objective became "let's
get it done as quick as possible so it does not interrupt the
holidays," Toys "R" Us Chief Executive Officer David Brandon
told Reuters in an interview. Filing for bankruptcy allowed the
company to secure financing to continue to operate its stores.
Given that "we successfully obtained our
debtor-in-possession financing today, we can assure our lenders
that we are in a good position to accept shipments on a normal
basis and they have great assurance they will be paid," Brandon
said.
FAILED DEALS
Like other retailers that own their stores, Toys "R" Us
tried last month to tap its vast real estate portfolio to raise
money in a sale-leaseback transaction, according to court
filings. Sale-leaseback deals allow retailers to raise cash by
selling real estate they own and then renting it back from the
new owner.
For example, Bon-Ton Stores Inc BONT.O , another retailer
in financial distress, completed a similar deal last week,
generating $18.9 million to pay down its debt.
In an attempt to clinch the sale-leaseback deal, Toys "R" Us
negotiated with a key group of creditors holding a portion of
the company's $1 billion term loan, but accounting issues and a
tight time frame prevented them from reaching an agreement,
according to people familiar with the matter.
Toys "R" Us also went to the bondholders of its
international affiliates last month for financing it planned to
use to fund its U.S. operations, but the terms offered were too
expensive, the people said.
At that point, Toys "R" Us decided to change tack and
initiate preparations for a Chapter 11 filing in September,
ahead of the quarterly earnings release on Sept. 26. News
reports about the possible bankruptcy on Sept. 6 accelerated
bankruptcy preparations, because suppliers to Toys "R" Us curbed
their shipments, afraid they might not be repaid, according to
the filings.
In a sign of the company's haste, it filed for bankruptcy
without a plan of reorganization or a deal with creditors, as is
preferred in these circumstances. Toys "R" Us said it plans to
keep its stores open through the bankruptcy process, though it
remains unclear whether it can emerge from bankruptcy with most
of its approximately 1,600 stores still open.
On Tuesday, Toys "R" Us Inc received bankruptcy court
permission to borrow more than $2 billion to start paying
suppliers, so it can stock up on items like Lego building blocks
and Barbie dolls for the holiday season. urn:newsml:reuters.com:*:nL4N1M01Z0
Private equity firms KKR & Co LP KKR.N and Bain Capital
LP, together with real estate investment trust Vornado Realty
Trust VNO.N , took Toys "R" Us private in 2005. On Monday, they
all supported the company filing for bankruptcy, according to
the sources.
(Reporting by Jessica DiNapoli in New York and Tracy Rucinski
in Chicago; Editing by Greg Roumeliotis and Leslie Adler)
((Jessica.DiNapoli@thomsonreuters.com; 646-223-4678;))
Keywords: TOYS R US BANKRUPTCY/TIMELINE