Toys ‘R’ Us files for bankruptcy protection; keeping stores open

Toys "R" Us filed for Chapter 11 bankruptcy protection late Monday night in federal court in Richmond, Va., with an eye to revamping its long-term -- and massive -- debt totaling more than $5 billion.



The nation's largest specialty toy retailer has been burdened with a heavy debt load since 2005, when it was purchased by private equity investors KKR, Bain Capital, and Vornado Realty Trust in a $7.5 billion buyout. Toys "R" Us faced $400 million in debt payment coming due in 2018. In early June, it hired Kirkland & Ellis, a law firm that specializes in corporate restructurings.



In addition to its Chapter 11 filing, the retailer also intends to seek bankruptcy protection in parallel proceedings for its Canadian subsidiary. Its operations outside of the U.S. and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the filings. The company said its approximately 1,600 Toys “R” Us and Babies “R” Us stores around the world would continue to operate as usual.



Toys "R" Us said that it has received a commitment from some lenders, including a syndicate led by JP Morgan, for over $3 billion in debtor-in-possession financing, subject to court approval.



"Today marks 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,” said Dave Brandon, chairman and CEO. “Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5 billion of long-term debt on our balance sheet, which will provide us with greater financial flexibility to invest in our business, continue to improve the customer experience in our physical stores and online, and strengthen our competitive position in an increasingly challenging and rapidly changing retail marketplace worldwide."



While the holiday season is important to most retailers, it is especially critical to Toys "R" Us. (Forty percent of the retailer's U.S. sales last year occurred in the fourth quarter.) In recent weeks, reports have circulated that some of the chain's vendors were curtailing, or scaling back shipments. The filing will allow Toys "R" Us to better manage the holiday season and give some assurance to its suppliers. Industry experts speculated that the company, which is already in heated competition with Walmart, Target and Amazon for toy sales, is likely to beef up its holiday discounts.



"We thank our vendors for their ongoing support through this important season and beyond," Brandon said. "We also appreciate the strong support our investors have provided over time and the constructive role they are playing in this process that will allow us to create a brighter future for our company."



The filing did not come as a surprise. Fitch Ratings on Monday downgraded the long-term issuer default ratings (IDRs) for Toys "R" Us. Fitch said the downgrade "reflects the material market information regarding the hiring of various financial advisors and law firms, a claims agent and supplier issues that suggest a restructuring could be imminent."



Analyst Neil Saunders, managing director of GlobalData Retail, commented that in addition to high debt, severe structural changes in the industry have created a toxic mix against which Toys "R" Us had little choice but to restructure and try to put itself on a firmer footing.



"The past decade has seen a dramatic change in the domestic toy market with new channels, increased competition, and new technology all having a deleterious impact on the sector and traditional toy stores," he said. "Unfortunately, Toys "R" Us has not responded effectively to these challenges and, as a result, has found itself with both a weak balance sheet and falling sales."



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