Toys R Us said to prepare for shutdown of U.S. operations

Toys R Us is preparing for a liquidation of its bankrupt U.S. operations after so far failing to find a buyer or reach a debt restructuring deal with lenders, according to people familiar with the matter.

While the situation is still fluid, a shutdown of the U.S. division has become more likely in recent days, said the people, who asked not to be identified because the information is private. Hopes are fading that a buyer will emerge to keep some of the business operating, or that lenders will agree on restructuring terms, the people said.

The toy chain’s U.S. division entered bankruptcy in September, planning to emerge with a leaner business model and more manageable debt. A new $3.1 billion loan was obtained to keep the stores open during the turnaround effort, but results worsened more than expected during the holidays, casting doubt on the chain’s viability.

“While a Chapter 11 bankruptcy provides a company with breathing space, it is incumbent on the debtors’ management to show how it intends to reorganize as a going concern,” said Gregory Plotko, a partner in the bankruptcy practice at Richards Kibbe & Orbe. “My sense is that the major creditor group has not yet heard a compelling enough story, nor has a ‘white knight’ appeared.”

Bankruptcies have accelerated across the retail industry in the past two years, as chains struggle to adapt to broad consumer changes, such as the rise of e-commerce and shoppers’ shrinking budget for apparel.

A representative for Wayne, N.J.-based Toys R Us declined to comment.

Toys R Us’ downfall can be traced back to a $7.5 billion leveraged buyout in 2005, when Bain Capital, KKR & Co. and Vornado Realty Trust loaded the company with debt.