Executive Briefings

How Toys "R" Us Collapsed So Quickly

Toys "R" Us Inc., which somehow managed to sustain a crushing debt load for more than a decade after its 2005 buyout, finally succumbed last week to a "dangerous game of dominoes" that toppled the retailer in a matter of days.

Until the past few weeks, markets had reflected little doubt that a rescue deal would get done before the crucial holiday shopping season, as Toys "R" Us negotiated to restructure about $400m of borrowings due next year. But while creditors held out for a sweetened offer, people with knowledge of the matter said, the company started preparing for a possible Chapter 11 filing. That kicked off a chain of events that showed how quickly a retailer can buckle when key suppliers and creditors get spooked.

“The bankruptcy became a self-fulfilling prophecy,” said Hugh Ray, an attorney with McKool Smith in Houston. Credit managers and vendors “convinced each other it was a crisis, and the rumors fed on each other.”

The speed of their downfall was reflected in debt markets, where Toys ‘‘R’’ Us bonds that traded at almost par on Sept. 1 plunged to as low as 18 percent of face value last week. The upfront cost to insure $10m of debt against default skyrocketed from about $300,000 on Sept. 5 to $2.5m the next week. By Monday, the eve of the bankruptcy filing, it was $7.7m.

It’s not as if creditors weren’t well aware of troubles at Toys ‘‘R’’ Us. The Wayne, New Jersey-based company has operated for over 10 years with debt that now totals $5bn and costs the chain around $400m a year.

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Until the past few weeks, markets had reflected little doubt that a rescue deal would get done before the crucial holiday shopping season, as Toys "R" Us negotiated to restructure about $400m of borrowings due next year. But while creditors held out for a sweetened offer, people with knowledge of the matter said, the company started preparing for a possible Chapter 11 filing. That kicked off a chain of events that showed how quickly a retailer can buckle when key suppliers and creditors get spooked.

“The bankruptcy became a self-fulfilling prophecy,” said Hugh Ray, an attorney with McKool Smith in Houston. Credit managers and vendors “convinced each other it was a crisis, and the rumors fed on each other.”

The speed of their downfall was reflected in debt markets, where Toys ‘‘R’’ Us bonds that traded at almost par on Sept. 1 plunged to as low as 18 percent of face value last week. The upfront cost to insure $10m of debt against default skyrocketed from about $300,000 on Sept. 5 to $2.5m the next week. By Monday, the eve of the bankruptcy filing, it was $7.7m.

It’s not as if creditors weren’t well aware of troubles at Toys ‘‘R’’ Us. The Wayne, New Jersey-based company has operated for over 10 years with debt that now totals $5bn and costs the chain around $400m a year.

Read Full Article