Toys R Us restructuring debt, with bankruptcy filing an option

Pedestrians pass in front of Toy R Us' flagship store at Times Square in New York.
Pedestrians pass in front of Toy R Us' flagship store at Times Square in New York. PHOTO: BLOOMBERG

NEW YORK (REUTERS, BLOOMBERG) - Toys R Us Inc has hired law firm Kirkland & Ellis LLP to help weigh restructuring options ranging from a bankruptcy filing to raising financing as bricks and mortar retail goes through a major downturn, according people familiar with the matter.

The privately held toy retailer has approximately US$5 billion in debt, of which roughly US$400 million comes due next year. Toys R Us had roughly US$301 million in cash on its balance sheet as of April 29."

In a statement, the company said it would provide an update on how it planned to deal with its debt when it announced second quarter earnings on Sept 26.

A restructuring would help Toys R Us get its house in order ahead of the all-important holiday season, when the company has its biggest sales surge.

CNBC previously reported on the restructuring efforts, saying that one possible outcome of the deliberations could be bankruptcy. The report rippled through the toy industry and pushed down shares of Mattel and Hasbro.

Bankruptcy isn't being seriously discussed at this point, people familiar with the matter told Bloomberg.

Toys R Us' private equity owners - Bain Capital, KKR & Co and Vornado Realty Trust - loaded up the retailer with debt in a US$7.5 billion buyout more than a decade ago.

More than a dozen retailers including children's clothier The Gymboree Corporation and teen apparel seller Rue21 Inc have filed for bankruptcy this year as consumers shift their spending habits to e-commerce competitors. In addition to e-commerce, Toys R Us has seen steep competition from discounters Wal-Mart Stores and Target

Last year, the chain extended maturities on some of its borrowings, giving it more time to execute a turnaround plan by chief executive officer Dave Brandon. As part of his comeback bid, he is looking to spruce up stores with more toy demonstrations and other experiences - seeking an edge on online sites such as Amazon.

But it's been a struggle for the chain. Last Christmas brought disappointing results: Same-store sales dropped 2.5 per cent during the final nine weeks of last year, hurt by sluggish demand and deep discounts.

The weaknesses have carried into this year, with the company reporting in June a net loss of US$164 million in the fiscal first quarter of 2017, widening from US$126 million a year earlier, CNBC reported. Its same-store sales dropped 4.1 per cent.

A large portion of Toys R Us' debt is secured by real estate, which could help the company's refinancing prospects, according to Fitch. The ratings agency said that real estate valuations have largely remained the same or improved since Toys R Us' properties were appraised but cautioned that retail's recent financial weakness could hurt those figures.