Toys 'R' Us seeks bankruptcy to survive retail upheaval

Toys ‘R’ Us, the largest US toy store chain, which filed for bankruptcy late Monday, will ask a judge on Tuesday for permission to borrow money so that it can start paying suppliers to ensure it has Lego building blocks and Barbie dolls for the holiday season.

The Chapter 11 filing, to restructure $5 billion of long-term debt, is among the largest ever by a specialty retailer and casts doubt over the future of the company’s 64,000 employees and nearly 1,600 stores, which remain open.

The collapse came swiftly.

Reports earlier this month that the company hired a law firm that specializes in bankruptcy set off “a dangerous game of dominoes,” David Brandon, the company’s chief executive and chairman, said in a court filing.

Ten days later, nearly all the company’s vendors refused to ship products without cash in advance, forcing Toys ‘R’ Us to scramble to raise $1 billion for its nervous suppliers, according to court filings.

The timing could not be worse.

Toys ‘R’ Us is building inventory for the holiday season and fourth quarter, which accounts for 40 percent of net sales.

Toys ‘R’ Us received a commitment for over $3 billion in debtor-in-possession financing from lenders including a JPMorgan-led bank syndicate and certain existing lenders, said the Wayne, New Jersey-based company, which also operates the Babies ‘R’ Us chain.

Chief Executive Dave Brandon said in court filings that he hoped Chapter 11 would enable the company to address the financial constraints that “have held us back” in a “lasting and effective way.”

“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.”

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The company said it plans to spend $64.8 million before 2022 to make it more enjoyable to shop in its stores. The company cautioned it was not going to engage in an “unrelenting race to the bottom” by trying to slash prices to compete with Amazon.com, the only company that sells more toys than Toys ‘R’ Us.

“What they have going for them is they are the last major player in their market,” said David Berliner, a partner and restructuring specialist with BDO Consulting.

“The vendors don’t want to see them fail, so I think they have a good opportunity to survive,” he said.

However, Toys ‘R’ Us did not enter bankruptcy with the usual plan for store closures, a possible indication that the timing of the bankruptcy was beyond the company’s control.

Share prices of toy makers recovered some of the ground lost in recent days when investors grew worried about the ability of Toys ‘R’ Us to pay for holiday merchandise. Mattel gained 1.3 percent and Hasbro added 2.5 percent.

Toys ‘R’ Us is saddled with debt from a $6.6-billion buyout in 2005, led by KKR & Co LP and Bain Capital LP, together with real estate investment trust Vornado Realty Trust.

Toys ‘R’ Us has bonds coming due next year that have lost half their value this month, according to Thomson Reuters data, as investors have grown concerned about a possible bankruptcy.

The company opened a temporary store in New York City’s Times Square this year to capture more holiday shoppers, almost two years after it closed its flagship store barely a block away, driven out by high rents.

Its Canadian unit intends to seek protection in parallel proceedings under the Companies’ Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice, Toys ‘R’ Us said in a statement.

Operations outside of the United States and Canada, including about 255 licensed stores and joint venture partnerships in Asia, which are separate entities, are not part of the bankruptcy proceedings, Toys ‘R’ Us said.

More than a dozen significant retail chains have filed for bankruptcy this year. Among them were Perfumania Inc, apparel chains rue21 Inc and Gymboree Corp, discount shoe chain Payless Holdings LLC and designer clothing chain BCBG Max Azria Global Holdings LLC.

Major retailers, including Macy’s and Sears Holding, have closed hundreds of locations as they struggle to compete with discounters such as Wal-Mart Stores and Amazon.com.