Toys “R” Us filed for Chapter 11 in bankruptcy court in Richmond, Va., the company announced late last night.
The filing had been rumored for several days.
According to the company’s Chapter 11 petition, the company has $6.6 billion of assets and $7.9 billion of debt. Equity sponsors are KKR (through unit Toybox Holdings), Vornado Realty (through unit Vornado Truck), and affiliates of Bain Capital, with each holding roughly 32.5% of the company’s shares.
In a statement, the company said it would use the Chapter 11 to “restructure its outstanding debt and establish a sustainable capital structure that will enable it to invest in long-term growth and fuel its aspirations to bring play to kids everywhere and be a best friend to parents.”
The company operates some 1,600 stores around the world under the names, “Toys ‘R’ Us” and “Babies ‘R’ Us.”
The company further said that it intends to seek court supervision for its Canadian operations, as well, under the Companies Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice, but that neither filing would include any of the company’s other operations, which include about 255 licensed stores and a joint venture in Asia.
The company said 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 Chapter 11 filing and CCAA proceedings.
Beyond the company’s challenging capital structure, it is worth it to note that the company’s largest unsecured trade creditors include Mattel, with a claim of $135.6 million; Hasbro, with a claim of $59.1 million; Graco, with a claim of $59.1 million; Spin Master, with a claim of $32.8 million; and Lego, with a claim of $31.6 million.
Significant leverage and widespread speculation
The company cited its “significant leverage” as a driver of its Chapter 11, according to the first-day declaration in the case filed by CEO David Brandon.
According to Brandon, over the years the leverage left the company without capacity to maintain stores, provide expedited shipping options for customers, or implement a subscription-based delivery service.
Brandon also acknowledged that the company had “failed to capitalize” on its iconic brand “and its unique position as a one-stop shop for toys every day year round,” concluding, “The time for change, and reinvestment in operations, has come.”
But Brandon also pointed to the “widespread bankruptcy speculation in the media” as “leading to a severe constriction in the company’s trade terms.”
As Brandon sees it, if the media speculation did not cause the company’s financial distress, it clearly affected the timing of the company’s actions.
According to Brandon, the company hired Kirkland & Ellis and Alvarez & Marsal—a law firm and a financial advisory firm both known for their work in large corporate Chapter 11 situations, it should be noted—“to consider restructuring and capital structure solutions.” In addition, Brandon said, in late August, the company began negotiations with a group of lenders under its B-4 term loan to afford it breathing room through the holidays and to consider “restructuring alternatives.”
According to Brandon, however, “A news story published on September 6, 2017, reporting that the debtors were considering a Chapter 11 filing, started a dangerous game of dominos: within a week of its publication, nearly 40% of the company’s domestic and international product vendors refused to ship product without cash on delivery, cash in advance, or, in some cases, payment of all outstanding obligations. Further, many of the credit insurers and factoring parties that support critical Toys “R” Us vendors withdrew support.”
Noting that “the timing of all this could not have been worse,” Brandon said that given the company’s traditional 60-day trade terms, cash terms would require the company to immediately obtain more than $1 billion of new liquidity.
A Chapter 11 filing would allow the company to obtain DIP financing, which Brandon explained would stabilize operations and reopen supply channels for the holiday season.
In addition, Brandon said, the DIP obtained by the company provides “hundreds of millions of dollars of new money that is available for immediate and direct investment in the company’s stores and operations.”
The company said it had obtained a $3.1 billion DIP facility from “various lenders.”
Specifically, court filings show, the company’s DIP facility is comprised of three parts.
First is a $2.3 billion DIP ABL from a group led by J.P. Morgan Chase, consisting of a $1.85 billion ABL ($1.3 billion to be available on an interim basis) and a $450 million FILO senior secured term loan that will be used to refinance existing obligations under the company’s prepetition ABL and for general corporate purposes.
The ABL facility also contains a $300 million sub-facility tranche for Canadian operations.
Interest under the ADL facility is L+250, with a 1% LIBOR floor.
The second piece is a $450 million term loan DIP (up to $350 million to be available on an interim basis) provided by an ad hoc group of prepetition term lenders. Interest is at L+775, with a 1% LIBOR floor. NexBank SSB is the administrative and collateral agent.
The last piece of funding includes a commitment from an ad hoc group of holders of the company’s “Taj Notes” (roughly $583 million outstanding of 12% senior secured notes due Aug. 15, 2021, issued through unit, Tru Taj) to provide $375 million in incremental notes to support the company’s international operations. According to the Brandon declaration, the Taj noteholders also agreed to waive certain defaults under the Taj notes and to forbear from exercising rights and remedies pursuant to a default against the Debtors.
Among other things, the waiver allows the company’s prepetition Euro ABL facility to remain in place, Brandon said.
Also note that the DIP financing includes a provision for intracompany borrowing by U.S. borrowers from the company’s Canadian unit, Toys Canada, and Wayne Real Estate Parent Company, in an undetermined amount, from time-to-time (with the amount borrowed from Toys Canada capped at $75 million). — Alan Zimmerman
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