Ahead of its Sept. 26 second-quarter earnings call, toy giant Toys “R” Us has voluntarily filed for bankruptcy protection in the Eastern District of Virginia as a means of unburdening itself from massive debt on its balance sheet, $400 million of which comes due next year.
“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,” Chairman and Chief Executive Officer Dave Brandon said in a statement.
Toys “R” Us, which was purchased by Kohlberg Kravis Roberts, Bain Capital and Vornado Realty Trust for around $6 billion in 2005, said in a letter to its customers that it is “working to strengthen our financial position. The company, some of our U.S. subsidiaries and our Canadian subsidiary proactively and voluntarily filed for Chapter 11 in the U.S. and began parallel reorganization proceedings in Canada. … Through these important actions, we expect to restructure our long-term debt and instead use these resources to reinvest in our business, so that we can continue to improve your experience in our stores and online and separate ourselves from our competitors in today’s rapidly changing retail landscape.”
As of April 29, the company had $6.57 billion in assets and $7.89 billion in liabilities, according to the bankruptcy petition, obtained via Nationwide Research Company. Net sales decreased by $113 million, or 4.9 percent, to $2.2 billion for the 13 weeks ended April 29, compared with $2.3 billion for the same period last year, the company’s U.S. Securities and Exchange Commission 10-Q filing indicates.
Steve Jellinek, a vice president at Morningstar Credit Ratings, told Commercial Observer the bankruptcy didn’t come as a great surprise.
“I was expecting it for a couple of reasons,” Jellinek said, “Firstly, Toys ‘R’ Us had a heavy debt load because of its leveraged buyout. Secondly, the state of the retail market; there are just too many retailers—it was only a matter of time.”
He went on to say following the retail industry’s consolidation of bookstores and sporting goods stores, consolidation among toy retailers was bound to follow. “The competition in toys is pretty much the same as the competition in books,” Jellinek said. “You’re dealing with a commodity and the lower-priced retailer is going to win.” Two of those lower-priced retailers bringing the heat are online giant Amazon and Walmart.
CO reported on Sept. 11 that a bankruptcy could place $3.6 billion in commercial mortgage-backed securities loans at risk. The $507.6 million loan securitized in the Goldman Sachs/ Bank of America-sponsored TRU 2016-TOYS deal, backed by a portfolio of 123 Toys “R” Us and Babies “R” Us stores, is the CMBS loan with the largest exposure. “The big question everyone is asking is what’s going to happen with the TRU deal, but nobody knows at this point. The positives are strong diversity of geographic locations, conservative underwritten loan to value and a conservative dark value on the whole portfolio—around 82 percent,” Jellinek added.
All of Toys “R” Us’ roughly 1,600 Toys “R” Us and Babies “R” Us stores and e-commerce sites will remain open for business, the company said, due to a commitment of over $3 billion in debtor-in-possession financing from existing lenders led by J.P. Morgan.
Morningstar expects there to be some store closings eventually, Jellinek said. The stores that will escape the shutterings will be “good locations with high demand, strong populations and most likely high sales per square foot, and you’ll see that in the more densely populated areas,” he said.
Meanwhile, Toys “R” Us is maintaining hope about this year’s holiday season. The company said it has started its “seasonal hiring push,” and as CO previously reported, it recently opened a pop-up shop in Times Square.
One broker spoke of the benefits of the bankruptcy filing.
“I think Toys’ bankruptcy filing is probably a good thing, strategically, for the company,” retail broker Richard Hodos of CBRE said over email. “If they are able to secure the debtor-in-possession financing package, it should give them breathing room and a whole new level of cushion so they can make the strategic investments in the business and operational platform necessary (for the business) in the long run.”
Jellinek concurred that the bankruptcy filing isn’t all doom and gloom. “It could be a good thing if they have some of the debt extinguished so it’s more manageable, and can focus on profitable stores. The question is how are they going to compete going forward, even if they do close stores. Even in Class A locations, will the revenue be strong enough to survive? That’s the question.”