Facing Imminent Bankruptcy, Toys "R" Us Enters Death Spiral

Tyler Durden's picture

Last week's news that Toys “R” Us has hired bankruptcy lawyers Kirkland & Ellis to help restructure its heavy debt load, came as a shock to the company's creditors, who promptly sent its bond crashing from nearly par at the start of the month to 43 cents on the dollar as of Friday.

As Bloomberg first reported, K&E is focused on the $400MM in bond due 2018, while Toys “R” Us has also retained Lazard to help with debt refinancing. They will have their hands full: in addition to shrinking sales and heightened competition, Toys ‘R’ Us has been burdened with debt from an LBO12 years ago as a result of which Toys “R” Us’s private equity owners, Bain Capital, KKR and Vornado Realty Trust, loaded up the company with $7.5 billion in debt.

Last year, the retailer extended maturities on some of borrowings, giving it more time to execute a turnaround plan by Chief Executive Officer Dave Brandon. As part of his comeback bid, he was looking to spruce up stores with more toy demonstrations and other experiences - seeking an edge on online sites such as Amazon. However, last week's realization that the company is considering a debt-for-equity exchange, confirmed many worst fears that not only was the turnaround faltering but that underlying business was far weaker than expected.

The imminent restructuring, which judging by the shocking bond crash was completely unexpected, would help Toys “R” Us get its house in order ahead of the all-important holiday season, when the company has its biggest sales surge. Alas, now that the iconic toy retailer appears likely to cramdown at least one if not more creditor classes in some form of pre-pack Chapter 11, said sales surge may not happen at all if the company's suppliers suddenly get cold feet and refuse to stock up the company with much needed inventory.

Which is precisely what is happening.

Making matters worse, according to the WSJ, Toys ‘R’ Us could file for bankruptcy as soon as next week, while Bloomberg adds that nervous suppliers have scaled back shipments and tightened terms to the retailer ahead of the crucial holiday selling season, on worries they may not got repaid and their payables would be lumped alongside other unsecured pre-petition claims. 

The vendors are balking as Toys “R” Us continues talks with lenders over a new loan that would allow the company to stay open while it works out a recovery plan through bankruptcy proceedings, said the people, who asked not to be identified because discussions are private. The loan is being marketed by Lazard Ltd. to banks and existing creditors, said one of the people. 

Just like in the case of Sears discussed here at the end of August, suppliers have pulled back in part because the cost to insure their shipments to cash-strapped Toys “R” Us has become too expensive, according to Bloomberg sources. Since vendors traditionally rank among other unsecured creditors under a bankruptcy waterfall schedule, their decision on whether to continue shipping goods can play a large role in determining a retailer’s fate.

Unfortunately for Toys “R” Us, now that it has entered the self-reinforcing death spiral of collapsing liquidity and panicked vendors, it needs to find a financial solution immediately and resume shipments because the cash-strapped chain makes about 40% of its sales during the fourth-quarter holiday season. Much of its strategy revolves around getting exclusive products from key vendors, along with support for advertising and marketing.

For now, the toy merchant has been seeking to refinance $400 million of debt that comes due next year, although media reports suggest that the process has stalled. As a result, the company is now openly flirting with bankruptcy as an option although no decision about seeking court protection has been made.

Still, as Bloomberg calculates, Toys “R” Us has remained oddly profitable, generating $790 million in EBITDA, the most since 2012, yet even that is not enough to appease vendors many of whom now demand payment upfront. Not everyone thought: Hasbro is among toymakers that hasn’t curtailed shipments, spokeswoman Julie Duffy wrote in an email. “We continue to partner and ship, conducting business as usual, while managing our risk across all retailers to the appropriate levels,” Duffy wrote.

Hasbro may regret this decision very soon as according to the the company's 5 Year CDS, which in recent days have soared to 46 points upfront...

... the probability of default in the next five years is now 93%, and 60% over the next 12 months.

A Toys ‘R’ Us restructuring would add to a list of 25 retailers, including Rue21, Gymboree and Payless Shoe Source, that have filed for bankruptcy since the beginning of 2017. Another big box chain, Staples Inc., recently agreed to be taken private in a leveraged buyout.

Source: @ReorgFirstDay

While industrywide, toy sales have been strong in recent years, much of the growth is shifting to online sellers like Amazon.com Inc. and discounters like Wal-Mart Stores Inc. Amazon’s toy sales were up 24% last year, compared with 5% for the overall market and five years of declines for Toys “R” Us, according to analytics firm One Click Retail.

The company is not alone as it finds it is woefully behind in its competition with Amazon: some large toy brands, such as Lego and Star Wars, have also struggled recently, while the collectible Shopkins toys, which Toys ‘R’ Us helped launch, is on the downswing. Earlier this month, Lego AS reported its first decline in sales in 13 years and said it would cut 8% of its workforce. Another toy maker, Mattel Inc., replaced its chief executive earlier this year after a slide in holiday sales.

Ultimately, whatever the fate of Toys 'R' Us may be, it will inevitably go through bankruptcy court: according to the WSJ, in recent weeks Toys ‘R’ Us’s advisers have been hunting for a DIP loan to fund operations under chapter 11, effectively guaranteeing that a bankruptcy filing is now just a matter of days.

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Blue Steel 309's picture

So many toys in circulation, that I know a lot of families just trade them around through garage sales.

Mazzy's picture

Besides, real families are having fewer children.

GUS100CORRINA's picture

Toys "R" Us Enters Death Spiral: Facing Imminent Bankruptcy, Suppliers Halts Shipments

Observation: Is this another casualty of the AMZAON effect?

Between the Amazon effect and the DEMOGRAPHIC BOMB, toy companies and retailers will be facing tough times.

By the way, America has slaughtered 60 million plus babies to date! Just think about how many toys those murdered children would have enjoyed?

WELCOME TO YOUR NIGHTMARE AMERICA! Not only are toys sales in the tank, but GOD Almighty is ANGRY as well!!

Reminds me of the sermon by Puritan Preacher Jonathan Edwards titled: SINNERS IN THE HANDS OF AN ANGRY GOD

http://www.jonathan-edwards.org/Sinners.pdf

READ IT IF YOU DARE!!!! It is on youtube as well.

BaBaBouy's picture

Ga Ga Goo Goo, Me Wants i-phone 32 Gigs wit data plan... whaaaaaa...

Buckaroo Banzai's picture

Whodathunk, the market for cheap, flimsy, brightly-colored Chinese plastic crap is drying up.

Bes's picture

exactly

fucking brainless toys

not a one challeneges your child or pushes their intellect

fuck shitty plastic r us

bury them

MisterMousePotato's picture

" ... came as a shock to the company's creditors ... "

WTF? I don't have any money whatsoever invested in TRU (or any other interest, for that matter), and yet, I knew - what? six months ago? longer? - that they were in trouble.

"Shocked?" Maybe that word doesn't mean what I think it means.

erkme73's picture

"As Bloomberg first reported, K&E is focused on the $400MM in bond due 2081..."

 

2081!?  Why panic?  That's well beyond the lifespan of most people reading this article...

striped-pad's picture

It was a tyop. Should have been 2081.

striped-pda

yogibear's picture

Banksters "R" Us is thriving.

erkme73's picture

Obviously it was a type-o.  But in keeping with how the Tyler's proof-read and then correct mistakes (never), that type-o will stay there no matter how much it's ridiculed.

quadraspleen's picture

Amazon doing for ToysRUs exactly what ToysRUs did for your local toy store...remember them?

Not sure it has anything to do with religion but good shoe-horn

serotonindumptruck's picture

Amazon will be the only company who survives the Franchise Wars.

In the future, all online purchases will be made through Amazon.

If you choose to go out to eat, then all restaurants will be Taco Bell.

https://www.youtube.com/watch?v=gIcE4OvnqAY

erkme73's picture

My 4yo calls the UPS and FedEx delivery trucks that arrive at our house (nearly daily) the "Amazon guys"...

 

NoPension's picture

Costco..( we love you) and Carl Jr's... ( big ass fries)

....go away...baten.

Michael Musashi's picture

Amazon is the beast. Bezos is starting to morph into Mike Myer's Dr. Evil.

chuckymcgee's picture

I mean it really probably is a casualty of Amazon. Why take your screaming kids to Toyrus when you can find all of that on Amazon at a lower price?

kumquatsunite's picture

Ya know those slaughtered babies? Could be you might want to start talking to men about getting married and supporting their families and staying with one wife! Funny how great that works out in the end. No lawyers. No division of property. Two parents for the kiddies. Love it.

unsafe-space-time's picture

Abortions are God's work. You want to deal with 60 million more fags?

MozartIII's picture

They got PC years ago and stoped selling toy guns. Their sales have been falling since then.

 

Watch Target....

LewisDodgson's picture

You don't need to be religious to know that the West is morally bankrupt. Like Rome before the fall. Institutions crumbling, debt ridden, counterfit currency, barbarians flooding in, corruption and tyranny rampant.

Tolerance and Apathy are the last virtues of a dying society and we've got plenty of both.

Tijuana Donkey Show's picture

60 million unplanned, unsupported pregnancies. Besides, our country is fine killing babies and kids all over the globe, why not here? I think abortion would be more supported if they did it via drone strike.

BaBaBouy's picture

Imagine you have 6 Kidz and you MUST provide 6 I-Pones with Planz... Yeech...

Toxicosis's picture

It doesn't matter.  This is a real tragedy for me.  Because I'm a Toys R' Us Kid. 

SHEEPFUKKER's picture

Kids are born with i-gadgets now. Toys are a thing of the past. 

Blue Steel 309's picture

Remember when companies like this were in the business of selling things instead of selling securities?

homiegot's picture

I'm gonna miss hood parents beating the shit out of each other over cheap Chinese toys.

Mazzy's picture

I always enjoy seeing hoodrat boys on pink bicycles.  I mean it COULD be their sister's bike, but it's proably stolen.

Fun fact: if you ever have your bike stolen, just take a peek in the nearest apartment complex on a couple nice afternoons.  You might see it.

Blythes Master's picture

We used to ride around the hood and see a dindu on a bike, point and yell, "Hey, that's my bike." And the little bastards almost always wrecked trying to get away.

In the hood, the store is called, Toys B Us and Shit!

DoctorFix's picture

Bain capital, eh?  Imagine that.

813kml's picture

The Mormon vampire squid claims another victim.

kumquatsunite's picture

And that is why you should never vote for a Mormon. They have tithes to pay. And that's just the beginning of their "voluntary" contributions. 

In order to meet these, you got it? Pillage and burn to the ground everything Bain Capital and Mitt Romney can get their hands on.

gmj's picture

Why are LBOs still legal?  They destroy everything they touch.

nailgunner44's picture

You only have to look behind you
At who's undermined you
Destroy everything you touch today
Destroy me this way

https://www.youtube.com/watch?v=mCGhcCztD7A

Secret Weapon's picture

They need to back up their toys with physical gold.  Problems solved. 

afronaut's picture

Put the word sex before toys and instant success

canadian shenanigans's picture

All the kids want ipads these days, i don't blame them. RIP TRU

Umh's picture

So Toys R Us has been working for the bankers for the last 12 years. What an terrible way to go.

Mazzy's picture

Toys R Us's main problem has always been price.  A friend and I took a peek in there a couple years ago and got sticker shock.  Even as an 8 year old I knew they were a little on the pricey side, but they have gotten prohibitive at this point.  If people can't afford your product you won't get sales.

Pernicious Gold Phallusy's picture

You philistine. To a mom who doesn't work and gets the money from somebody else, kids are worth anything.

Hugh Mann's picture

If they sold things worth purchasing they wouldn't be going out of business. Unfortunately everything from automobiles to Tonka trucks has been turned into cheap, plastic shit. Nothing is being manufactured to last anymore. Everything has a designed life span. As a young boy, I had a few toy trucks made from metal that could probably stand the weight of a truck. Not anymore. Remember when refrigerator would last decades? Now you're lucky if you get five years out of one. Most retailers and speciality stores have become junk dealers. As someone else pointed out, most kids today would rather play a video game of tennis than actually go outside and play the real thing.

Ms No's picture

I swooped an old working dryer laying on the curb in Scottsdale.  It is of the ugly old light yellow variety, priceless.  Now I just need an old washer.

DemandSider's picture

The door seal on the 5 year old, front load, $750.00, Mexican, Whirlpool washer my wife bought disintegrated, so rather than throw more good money after bad, I bought a 15 year old, top load, Speed Queen for $75.00 off of Craigslist. After replacing the dried out v-belt for $10.00, it has worked flawlessly for 2 years, so far, and the clothes don't smell like mildew, anymore. I  washed 2 deer hides in it last fall. (I tie flys). No problems, no smell.

Same story for the $800.00, glass top stove she bought, after, oddly enough, the glass broke when she put a heavy pot of water on it. The heating element was then exposed, so it was pretty dangerous. Replaced with a mint condition, coiled heating element style stove for $75. The oven had never even been used. No problems. Every replacement part on the new/old stove is available, new, on eBay, "Buy it Now" price, for $20.00 or less. It would have been at least hundreds to buy and replace the glass for the "high tech", newer stove, which had hideous, brown stains on the glass even before shattering

The "modern", $800.00, (yes, the wife, again) digital refrigerator will be next. It wrecked the drywall in our tuck under garage after the "frostless" freezer iced up and leaked melt water. I fixed it by wrapping a few cents worth of copper wire from the defrost heater element to the fins surrounding in the freezer. For $800.00, you'd think Wall Street brands would have the frost issue completely licked, by now, but, you would be sadly mistaken, All digital readouts are fried, and the ice maker stops working unexpectedly on occasion. As with every other case in this appliance tragedy triad, its old, heavy, predeessor worked fine for decades, only to be unceremoniously jettisoned for the latest in Mexican plastic and software.

I give you "energy efficiency" in neoliberalized America.

 

Tapeworm's picture

+1 for the Speed Queen. They are commercial machines in a lighter housing.

 As you said, one belt in twenty years of service.