Daily Management Review

How Toys 'R' Us Was Caught Up by $5 Billion Of Debt


09/20/2017




How Toys 'R' Us Was Caught Up by $5 Billion Of Debt
Primarily due to its $6.6 billion leveraged buyout in 2005, $400 million in interest payments on its debt every year was being made by Toys “R” Us Inc. The biggest bankruptcy of a U.S. retailer since that of Kmart in 2004 resulted this week as it succumbed to its debt burden.
 
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, the largest U.S. toy retailer’s decision to file for Chapter 11 bankruptcy protection on Monday took investors by surprise.
 
But the company has exhausted its ability to kick the can down the road. According to bankruptcy court filings and people familiar with the deliberations, the company had been unsuccessful trying for seven-month to find relief from its $5.2 billion debt pile and the bankruptcy filing was the culmination of that effort by Toys “R” Us.
 
Bankruptcy filings show that in order to avoid a supply chain disruption stemming from vendor fears about repayment and to raise money that would have helped the company stave off bankruptcy before the key holiday shopping season, at least two deals with some of its creditors were explored by the advisers that Toys “R” Us hired to fix its capital structure.
 
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. highlighted the unwillingness of the Wayne, New Jersey-based company’s creditors to show any more leniency.
 
According to court filings, Toys “R” Us planned to fix its entire capital structure by January and the company was looking to raise at least $200 million to make it till then. Over the years, even as its financial performance deteriorated, Toys “R” Us had been able to win other short-term fixes from creditors.
 
Toys “R” Us Chief Executive Officer David Brandon said in an interview that the objective became “let’s get it done as quick as possible so it does not interrupt the holidays” once the company realized that it could not secure financing to get through the holiday season. Continuing to operate its stores was made possible by securing financing by filing for bankruptcy.
 
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.
 
According to court filings, to raise money in a sale-leaseback transaction, Toys “R” Us tried last month to tap its vast real estate portfolio, like other retailers that own their stores. Sale-leaseback deals allow retailers to raise cash by selling real estate they own and then renting it back from the new owner.
 
Sources said that accounting issues and a tight time frame prevented the company from reaching an agreement on the sale-leaseback deal, even as Toys “R” Us negotiated with a key group of creditors holding a portion of the company’s $1 billion term loan.
 
Sources also reportedly said that for financing it planned to use to fund its U.S. operations, Toys “R” Us also went to the bondholders of its international affiliates last month. But that did not mature as the terms offered were too expensive.
 
And it was at this point, just ahead of its quarterly earnings release on Sept. 26., Toys “R” Us decided to change tack and initiate preparations for a Chapter 11 filing in September.
 
(Source:www.reuters.com) 






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