Toys R Us filed for Chapter 11 protection late Monday night (18 September), blaming its precipitous fall into bankruptcy on 6 September news coverage about the restructuring that caused vendors around the world to refuse to ship to the company without cash on delivery.
The company filed its case in the Eastern District of Virginia, where Judge Keith Phillips held a “first-day” hearing this morning, at 11am ET. In terms of venue, the regional decision may be taking a cue from The Gymboree Corporation, which had a relatively seamless route to getting its Chapter 11 plan confirmed earlier this month in the same court, and with the same set of debtors’ counsel – Kirkland & Ellis, Kutak Rock, and Munger Tolles & Olson.
Kirkland partner Joshua Sussberg kicked off his opening statements in court today by singing along to the company’s 1980s theme song, but without a plan lined up, he may change his tune before the case is over. “This company needs to restructure, but it needs to do so in a coordinated way,” Sussberg said.
Judge Phillips approved the company’s USD 3.1bn debtor-in-possession (DIP) financing on an interim basis at today’s hearing, overruling objections from holders of a minority of the notes of the so-called “TRU Taj” international debtors. He found the adequate protection contained in the financing to be adequate, but said objectors will be able to raise their arguments again at a final hearing, scheduled for 10 October.
Toys “R” Us has been highly leveraged for more than a decade, paying about USD 400m annually to service more than USD 5bn of debt, CEO David Brandon said in court filings. Those payments hampered the company’s ability to invest in its business, allowing it to fall behind its primary competitors with regard to the upkeep of its stores, its inability to provide expedited shipping, and its lack of a subscription-based delivery service, he said.
Toys hired Lazard & Freres, Alvarez & Marsal and Kirkland & Ellis earlier this year to work on plans for an orderly Chapter 11, but when news broke earlier this month that Toys was considering a bankruptcy filing, trade and credit insurers immediately began to pull terms and cease shipping product, Brandon said. “The impact on the company’s supply chain was fast and furious,” he said. “Within a week, 40 percent of the debtors’ supply chain refused to ship product and 10 days later, practically all of the debtors’ vendors had refused to ship without cash on delivery. The company lost its access to product during the critical shipping period to build inventory for the holiday season.”
Toys faces USD 444m of maturities next year, split between a USD 49m French propco facility due February; a USD 124m Libor+ 375bps (1.5% floor) TLB-2 due May out of Toys Delaware; a USD 62m L+ 375bps (1.5% floor) TLB-3 due May out of Toys Delaware; and a USD 209m 7.375% holdco note due in October. Then in 2019, Toys has USD 2.6bn of debt, and another USD 1.36bn maturing in 2020.
The company will make use of its proposed USD 3.125bn DIP to help stabilize operations and reopen its supply channels before the holiday season, Brandon said. This is the largest amount of DIP borrowings by a single company over the past two years, outside of Energy Future Holdings. The North American debtors are borrowing USD 2.75bn, while European debtors are borrowing USD 375m.
Toys’ North American debtors are borrowing USD 1.85bn in revolving loan commitments and USD 450m in FILO term loan commitments pursuant to an ABL/FILO facility, whose proceeds will be used in part to completely repay the over USD 1bn outstanding under the pre-petition ABL loan. The entire FILO TL will be available on an interim basis, while only USD 1.3bn of revolving loan commitments will be available after entry of the final DIP order, when the other USD 550m will become available. The FILO commitments are USD 170m greater than the pre-petition FILO balance. The revolver/FILO facility also includes a USD 300m sub-facility for Canadian debtors, which will be subject to parallel CCAA proceedings in Canada. The Canadian debtors are not obligated on the US loan commitments.
In addition, Toys is borrowing USD 450m in term loans through a term facility from an ad hoc group of TL B-4 lenders, which is represented by Wachtell Lipton Rosen & Katz and Houlihan Lokey. The loan is structured as a delayed draw TL, with USD 350m available on an interim basis and up to USD 100m available on a final basis. The six-member group, which purportedly holds over 50% of pre-petition term loans, is led by Franklin Mutual Advisers and Angelo, Gordon & Co., which will be providing USD 139.6m and USD 126.7m of DIP loans respectively. The other four members are Marathon Asset Management, Solus Alternative Asset Management, Redwood Capital Management and HPS Investment Partners—each providing between USD 18.1m and 86.7m of DIP TLs.
Toys “R”Us-Delaware, Inc. is also party to intercompany DIP financing on a superpriority priming lien basis from Toys Canada (for USD 75m) and Wayne Real Estate Parent Company, LLC (periodic term loans in an amount to be determined).
Lastly, international subsidiaries Tru Taj LLC and Tru Taj Finance, Inc. are borrowing an additional USD 375m of incremental notes paying 11% interest from an ad hoc group of Taj Noteholders. The notes are guaranteed by Toys “R” Us, Inc., a number of foreign debtors, in addition to numerous non-debtor entities. The ad hoc group of Taj noteholders agreed to waive certain defaults under the pre-petition Taj notes and forbear from exercising rights/remedies in connection with a potential default.
The debtors state that there are aggregate fees for the DIP facilities totaling USD 96.5m.
The ABL/FILO DIP is the only DIP to include milestones, which are quite limited and only relate to the entry of interim and final DIP orders in the US and Canada.
Toys has about 1,697 stores and 257 licensed stores in 38 countries, plus additional e-commerce sites in various countries. The company also runs seasonal “pop-up shops” and express stores during the holiday season. It maintains about 60,000 full-time and part-time employees worldwide, growing to more than 100,000 during peak holiday season.