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Big debts to Wall Street have bankrupted Toys "R" Us

by Peter A. McKay
Sep 19 2017, 12:10am

Toys “R” Us, the iconic retailer with the once-famous jingle about wanting to stay a kid forever, now has a very grown-up problem: It’s bankrupt.

The company filed for Chapter 11 protections Monday night — a move that will allow it to reorganize its $5 billion in debt to pay off creditors over time. Like other retailers, the company has been beset by increased competition in recent years from Amazon, Wal-Mart, and others. But unlike most, it was also saddled with a ton of debt as a result of being purchased in a by a team of private-equity and real estate investors back 2005.

Private equity firms tend to borrow a lot of money using the assets of the company they purchase as collateral. Borrowing allows them to get the quick cash they need to reshape a troubled business. (Conveniently, it can also help the Wall Street firms reap big investment gains while putting up relatively little of their own money.) But the company doesn’t turn around fast, all that debt can become a problem. And that’s that’s essentially what’s happening with Toys ‘R’ Us.

In its announcement of the Chapter 11 filing, the company noted it has also secured $3 billion in financing from J.P. Morgan Chase and other lenders to help it get through the bankruptcy process. In particular, the money will help to pay vendors and keep the shelves stocked at the company’s 1,600-plus stores.

That step will be crucial as the holiday season, which typically generates about 40 percent of Toys “R” Us revenue, approaches.

“Today marks the dawn of a new era at Toys ‘R’ Us where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” Dave Brandon, the company’s chairman and chief executive, said in a statement.

Other details to watch:

  • Though Toys “R” Us stock is private, its publicly traded bonds have been hammered by the bankruptcy filing. The price of its bonds set to be paid off in in October 2018 plunged in recent days to about 20 cents on the dollar, less than half value at the end of last week.
  • Founder Charles Lazarus opened the first Toys “R” Us store in 1957. Lazarus had previously owned a baby-furniture store, but eventually added toys to its offerings, then branched off into toys as a standalone business.
  • The Toys “R” Us bankruptcy filing is the latest sad episode in what has been a brutal year for retailers in general. More than 20 have filed for bankruptcy so far in 2017, and up to 10 percent of retail square footage may have to be shuttered due to the rising popularity of e-commerce, according to research reported by Bloomberg.

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