Lenders against paying severance
Hedge funds don’t plan to contribute to ex-employees.
The private equity owners of Toys R Us may be taking unprecedented steps toward supporting the company’s former workers, but the lenders that financed its bankruptcy — and ultimate liquidation — are making no such promises.
Angelo Gordon & Co. LP and Solus Alternative Asset Management don’t plan to contribute any more cash to benefit Toys R Us employees who were left jobless when the biggest U.S. toy retail chain shut down, according to an Aug. 21 letter reviewed by Bloomberg. The letter from lawyers at Wachtell, Lipton, Rosen & Katz came in response to two worker advocacy groups who asked the hedge funds last month “to take responsibility by ensuring that Toys R Us employees receive the money that they had been counting on.”
While they recognize the hardship for the workers, Angelo Gordon and Solus didn’t cause the company’s domestic collapse, according to lawyers at Wachtell, Lipton, Rosen & Katz. “Accordingly, we do not believe there is a sound basis to claim that Toys R Us secured lenders should make additional financial contributions for the benefit of employees or other unsecured lenders,” wrote Wachtell’s Joshua Feltman and Emil Kleinhaus.
In court, the defunct chain’s 33,000 workers have been seeking the same treatment as creditors, who customarily are given high priority under the U.S. bankruptcy code because their services are considered crucial to winding down a company — a category known as administrative claims.
They’ve been competing for a the shrinking pool of cash left at Toys R Us with traditional administrative creditors, who would likely oppose the effort since they’d be less likely to get full payment on their own claims, and there’s already doubt about whether there’s enough to go around even before the workers are considered.
Wachtell’s letter said there’s $180 million set aside for unsecured creditors with administrative claims. The two advocacy groups, which include the Center for Popular Democracy and the Private Equity Stakeholder Project, estimated the workers should have received $75 million in severance under the company’s policy, and are asking for contributions to meet that sum.
Both KKR & Co. and Bain Capital, two of the three firms that bought Toys R Us in a leveraged buyout more than a decade ago, have said they’ll contribute, according to the July 26 letter from the advocacy groups. The third owner, Vornado Realty Trust, has yet to respond, the groups have said.
Angelo Gordon and Solus had sought the best outcome for all stakeholders including employees, their lawyers wrote. “For example, employees were paid in full for the 60-day period following their WARN Act notification, regardless of whether they were involved in the wind-down,” they said. The WARN notification refers to laws that require advance notice to workers when a factory or facility is planning a mass dismissal.
The efforts to get severance pay is just one part of the long drama of the decline and fall of Toys R Us, which until it began liquidating this year was the nation’s largest standalone toy retailer. The company, based in Wayne, N.J., took on $5 billion of debt in a leveraged buyout, a burden that left it ill-equipped to handle competition from Walmart Inc. and Amazon. com.