Toys ‘R’ Us Melts Down, Files for Bankruptcy, Bonds Collapse


by Wolf Richter, Wolf Street:

Another retailer owned by private equity firms goes bust.

Toys “R” Us filed for Chapter 11 bankruptcy late Monday in the US Bankruptcy Court in Richmond, Virginia. The bonds of the largest toy retail chain in the US have gotten crushed, as word was spreading that it was preparing to file for bankruptcy. Standard & Poor’s rates the bonds a merciful CCC-. This is deep into junk, but still two notches above D for “default.”

The a $208 million issue of senior unsecured notes due in October 2018 with a coupon of 7.375{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} had plunged to 46 cents on the dollar on Friday, from 65 on Thursday. Today, they dropped below 21 cents on the dollar before the bankruptcy filing.

They have now plunged 78{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} since September 4, when they were still trading at 97 cents on the dollar. The plunge of those notes began in earnest on September 6, when it became known that the company had hired law firm Kirkland & Ellis, whose bankruptcy-and-restructuring practice is considered a leader in the industry. That was the sign. At the time, “sources familiar with the situation” said that bankruptcy was one of the options. And all heck broke loose for those bonds.

Toys “R” Us has $5.2 billion in long-term debt, according to its latest quarterly report, and sports a negative equity of $1.3 billion. Quarterly sales declined 4.8{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} year-over-year, to $2.2 billion. Same-store sales dropped 4.1{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. And the net loss jumped to $164 million.

Under attack from Amazon, Walmart, and other online and brick-and-mortar competitors, sales of Toys “R” Us in the quarter were down 15{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} from the same quarter in 2012. Yet toy industry sales have been growing by around 5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} a year over the period.

“With these debt levels, how much actual flexibility do you have in this environment?” Charles O’Shea, who covers Toys “R” Us for Moody’s, told Bloomberg. “You have to invest online – because your principal competitors there are really good – and you’ve got to deal with the debt load and your maturities on top of that. The pie is only so big.”

About $400 million of its debt comes due in 2018, including the above mentioned notes that have collapsed. In 2019, $2.6 billion in debt come due. In 2020, another $1.36 billion will mature. And Toys “R” Us doesn’t have the means to redeem this debt, and the possibility of new debt to pay off old debt has dried up. So it needs to restructure its debts, and creditors are going to get their heads handed to them, and a bankruptcy filing is now the chosen mechanism by which to do this.

On September 14, Bloomberg reported that, “according to people with knowledge of the matter,” some vendors, fearing getting caught up in a bankruptcy and facing soaring costs to insure their receivables from Toys “R” Us, are curtailing their shipments to the company. This is terrible timing, just before the holidays, when Toys “R” Us makes about 40{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of its annual sales and when it desperately needs the merchandise to make those sales.

Vendors rank low on the totem pole of creditors during bankruptcy proceedings and have often little chance of getting repaid. This scares vendors. But when vendors get scared and pull back, it seals the merchant’s fate since it won’t have the  merchandise it needs to sell in order to stay alive.

On September 7, Debtwire reported that Toys “R” Us was holding talks with restricted investors about raising rescue financing to pay off the debt maturing in 2018, but at the same time was also trying to line up “debtor-in-possession” financing. DIP financing, which grants lenders special rights, is used to fund a company during bankruptcy proceedings. This was a strong indication of what would happen next.

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