RICHMOND, VA—Toys “R” Us Inc. on Tuesday sought court approval for debtor in possession financing at US Bankruptcy Court for the Eastern District of Virginia here. The toy retailer filed for Chapter 11 protection Monday night, the latest of several chains to go that route in 2017.
The Wayne, NJ-based company said Monday evening it had received a commitment for $3 billion in DIP financing from lenders that include a JPMorgan-led bank syndicate and some of the company's existing lenders. Toys “R” Us was taken private in 2005 by a group that included Bain Capital, KKR and Vornado Realty Trust; the REIT continues to hold a 32.5% stake, although it neither holds nor guarantees any of the retailer's debt.
The leveraged debt associated with that $7.5-billion buyout has been among the retailer's longstanding obstacles. In a court filing Tuesday, CEO David Brandon cited the $400 million in cash needed each year to service the $5.3 billion of funded indebtedness stemming largely from the privatization.
Another has been “unrelenting” competition from online and warehouse retailers, Brandon declared in court documents. “During the 2016 holiday season, big box retailers slashed prices on toys and flooded marketing channels, knowing that if they can get consumers in the door to purchase attractively-priced toys, they can make up for decreased toy revenue with other in-store purchases,” Brandon said. “Further, online retailers such as Amazon are not concerned with making a profit at this juncture, rendering their pricing model impossible to compete with for a company such as Toys 'R' Us.”
Although Brandon said in a news release that the Chapter 11 filing marked “the dawn of a new era at Toys 'R' Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” in his statement to the bankruptcy court he noted that the timing couldn't have been worse. “Widespread 'bankruptcy' speculation in the media” led to a severe constriction in the company's trade terms just as it began to build inventory for the crucial holiday selling season, and Brandon went ahead with a bankruptcy filing in order to reopen the supply chain, according to court documents.
This year has already seen filings, and in some cases liquidations, by Gymboree, Payless ShoeSource, Wet Seal and the Limited, among hundreds of others. At this juncture, Toys “R” Us intends to maintain normal operations at its 1,600 locations globally, under the Toys “R” Us and Babies “R” Us banners.
Operations outside the US and Canada are not part of the Chapter 11 filing. Kirkland & Ellis LLP is serving as principal legal counsel to Toys “R” Us, Alvarez & Marsal is serving as restructuring advisor and Lazard is serving as financial advisor.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
