With $5.2B in debt, Toys R Us files Ch. 11

Toys R Us yesterday won approval to borrow more than $2 million to pay suppliers and build its inventory for the crucial holiday shopping season after filing for bankruptcy protection to restructure more than $5.2 billion in long-term debt.

A Sept. 6 news report that the nation’s largest toy retailer had hired a law firm to consider restructuring options, including Chapter 11 bankruptcy, started a “dangerous game of dominos,” CEO David Brandon said in a court filing. Almost 40 percent of the highly leveraged company’s vendors refused to ship products without cash and/or payment of outstanding invoices.

The timing “could not have been worse,” Brandon said, because the fourth quarter accounts for about 40 percent of the company’s annual revenue.

“This creates an impossible situation for the cash-strapped retailer, and it could not only impede the ability of Toys R Us to have enough inventory to meet the holiday selling season demand ... but also it did hasten the bankruptcy filing,” bankruptcy lawyer Chuck Tatelbaum said.

Toys R Us was taken private in 2005 in a $6.6 billion leveraged buyout by Boston’s Bain Capital Private Equity and New York-based Kohlberg Kravis Roberts and Vornado Realty Trust in a deal that included $5.3 billion of debt. The company has nearly 1,600 stores in 49 states and 38 countries. Its operations outside of the U.S. and Canada are excluded from bankruptcy proceedings.

Toys R Us has seen its sales and profit declining for the past five years while operating for more than a decade with debt that costs approximately $400 million a year to service, preventing it from investing in its business, according to court documents. That is amid “unrelenting” competition from retailers including Amazon.com, Walmart and Target that continues to drag on its performance.

Toys R Us was unable to slash prices and engage in a “race to the bottom,” Brandon said.