Saturday, September 16, 2017

Toys "R" Us: A PEU Return?


Bloomberg reported:

Some suppliers to Toys “R” Us Inc. have scaled back shipments to the retailer as it struggles to refinance debt and avoid a potential bankruptcy filing, according to people with knowledge of the matter.

The vendors are balking as Toys “R” Us continues talks with lenders over a new loan that would allow the company to stay open while it works out a recovery plan through bankruptcy proceedings, said the people, who asked not to be identified because discussions are private. The loan is being marketed by Lazard Ltd. to banks and existing creditors, said one of the people. 
Bain Capital owns Toys "R" Us alongside fellow private equity underwriter (PEU) KKR:

Toys “R” Us has vexed private equity owners Bain Capital, KKR & Co. and Vornado Realty Trust, which loaded the retailer with debt in a $7.5 billion buyout more than a decade ago. 

As doubts about the company’s health mounted, the cost for debtholders to insure against a default by Toys “R” Us surged in the past week to levels that imply a more than 60 percent chance it won’t meet its obligations in the next year. Credit-default swaps expiring in June were trading at 36 percentage points upfront, or $3.6 million for every $10 million of debt insured, according to data provider CMA. That’s up from $300,000 per $10 million at the start of the month.
Toys "R" Us bonds fell to 43 cents on the dollar on Friday.  CDS coverage rose to $4.6 million for every $10 million of debt insured.

Bain, KKR and Vornado won't throw good money after bad.  They are shopping for "a DIP loan to fund operations under chapter 11."  Will Toys "R" Us owners have gotten their money's worth from the company before they return it to debtholders?

Update 9-18-17:  Implosion is imminent.  Bloomberg reported "Credit default swaps expiring in December traded at more than 75 points upfront Monday. That means it would cost about $7.5 million to insure $10 million of Toys “R” Us debt.  Its 7.375 percent notes due 2018 traded for as little as 18 cents during Monday’s session."

Update 9-19-17:  Bain, KKR and Vornado returned Toys "R" Us to bondholders with its bankruptcy filing in Richmond, Virginia.  It's the second largest retail bankruptcy filing ever.

Update 6-3-18:  The PEU boys reneged on employee severance pay mostly because they don't care about the little people.  Cash goes to sponsor via dividend bleeding.  None is left for the hardworking people who've spent a career.  Employees reached out to Blue Team corporacrats Robert Menendez and Cory Booker for help.  That pair may toss Toys R Us employees an anchor.