Report: Toys R Us bankruptcy set

Chain has struggled since takeover piled debt on company

Toys R Us Inc., which has struggled to lift its fortunes in the more than a decade after a buyout loaded the retailer with debt, is preparing a bankruptcy filing, according to people familiar with the situation.

The Chapter 11 reorganization of America’s largest toy chain would deal another blow to a retail industry that’s already reeling from store closures, sluggish mall traffic and the rise of Amazon. com Inc.

The filing would allow Toys R Us to restructure $400 million in debt that comes due next year. The retailer has hired a claims agent, which typically helps with administering such a process, people with knowledge of the situation said last week. And its vendors have been curtailing shipments amid concern that Toys R Us might not be able to pay its bills.

“This filing is really a buildup of financial problems over the past 15 years,” said Jim Silver, an industry analyst and the editor of toyreview site Toys, Tots, Pets and More.. “Finally, the straw broke the camel’s back.”

With speculation of a bankruptcy mounting, shares of Toys R Us’ vendors tumbled on Monday. Mattel Inc., the maker of Barbie and Fisher-Price, fell 6.2 percent — its worst decline in seven weeks. Shares of Hasbro, the company behind Monopoly, Nerf and Transformers, dropped 1.7 percent.

A representative for Toys R Us declined to comment.

JPMorgan Chase & Co., Barclays PLC, Goldman Sachs Group Inc. and Wells Fargo & Co. are said to be vying to provide financing for Toys R Us while it goes through bankruptcy.

Much of the toy supplier’s debt is the legacy of a $7.5 billion leveraged buyout more than a decade ago. In 2005, Bain Capital, KKR & Co. and Vornado Realty Trust loaded Toys R Us up with debt to take it private. Since then, the Wayne, N.J.-based chain has struggled to dig itself out.

Some years, the company had to spend as much as half a billion dollars on cash interest expenses alone, according to Bloomberg Intelligence analyst Noel Hebert. That left Toys R Us with less cash to put toward store expansions, merchandising, and — crucially — the growth of its online presence.

“With these debt levels, how much actual flexibility do you have in this environment?” asked Charles O’Shea, who covers Toys R Us for Moody’s Corp. “You have to invest online — because your principal competitors there are really good — and you’ve got to deal with the debt load and your maturities on top of that. The pie is only so big.”

In 2015, Toys R Us named Dave Brandon as its chief executive officer, turning to the former head of Domino’s Pizza Inc. to attempt a comeback. Brandon had run Domino’s for 11 years and gained a reputation as a turnaround artist. He helped shepherd the pizza chain, then owned by Bain Capital Partners, through the largest initial public offering in restaurant history in 2004.

Brandon showed signs of progress in early 2016, when the company posted its first Christmas season sales gain in four years.

That year, the chain extended maturities on some of its borrowings, giving it more time to execute Brandon’s plan. As part of his revival effort, he has been sprucing up stores with more toy demonstrations and other experiences.

But the comeback faltered in the more recent Christmas season. Same-store sales dropped 2.5 percent during the final nine weeks of last year, hurt by sluggish demand and deep discounts. The toy seller had to reckon with new competitors driving prices lower and lower, O’Shea said.

Brandon, 65, lamented the price competition during a conference call in June.

“Make no mistake about it, there is a little bit of a price war situation right now,” Brandon said.

As the woes have piled up, the cost of insuring against default on Toys R Us debt has surged. Prices on six-month and one- year swaps have climbed to record highs, suggesting the market is pricing in all-but-certain odds of a Chapter 11 filing, which protects companies against creditors during a reorganization.

Six-month credit-default swaps traded at more than 71 points upfront Monday. That means it would cost about $7.1 million to insure $10 million of Toys R Us debt for the next six months.

Toys R Us’ bonds have been hammered. Its 7.375 percent notes due 2018 fell 26 cents Friday to trade at 46 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s down from 97.25 cents on Aug. 30.

If Toys R Us can get its debt under control again, the chain still has promise, Silver said. Its earnings before interest, taxes, depreciation and amortization has been good, he said.

“If they didn’t have the debt, they would be making $500 [million] to $600 million a year in profit,” he said. “The problem is the debt.”