Toys R Us has filed for chapter 11 bankruptcy protection, the company announced Monday.
The bankruptcy filing helps the Wayne New Jersey-based toy retailer relieve itself of the debt left over from its $6.6 billion acquisition by Kohlberg Kravis Roberts, Bain Capital Partners and real estate investment trust Vornado Realty Trust in a 2005 deal valued at $6.6 billion.
The retailer has $4.9 billion in debt, $400-million of which has interest payments due in 2018 and $1.7 billion of which is due in 2019.
“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,” said Dave Brandon, the company’s chairman and CEO, said in a release announcing the filing.
“We are confident that these are the right steps to ensure that the iconic Toys”R”Us and Babies”R”Us brands live on for many generations,” he adds.
The toy seller also intends to seek protection in parallel proceedings for its Canadian subsidiary.
The company said it will continue to operate as usual its approximately 1,600 Toy R Us and Babies R Us stores around the world. The company’s operations outside of the U.S. and Canada are not part of the protections proceedings, it said.
The retailer said that it has already received a commitment from some lenders, including a JPMorgan-led syndicate, for over $3-billion in debtor-in-possession financing. Although that’s subject to court approval, Toys R Us said it “is expected to immediately improve the Company’s financial health and support its ongoing operations during the
Restructuring that debt would give Toys R Us the financial flexibility to continue its turnaround. Initiatives include improving its website and revamping its Babies R Us business, by focusing on items like cribs that are less likely than diapers to be sold on Amazon.
A bankruptcy filing will also help the retailer manage the the crucial holiday season and give vendors like Mattel and Hasbro clarity into its long-term plans.
For its owners, the bankruptcy filing ends a chapter that started at a time when private equity dove into the retail industry, buoyed by low interest rates and the attraction of recognizable names. That flurry has come back to haunt many, as debt burdens have made it difficult for retailers to make the necessary investments to adjust to the rapidly changing retail industry.
Private equity-backed Payless ShoeSource and Gymboree are among those that have filed for bankruptcy over the past two years.
For Vornado, the deal was a bet on the value of Toys R Us’s real estate. It came just a year after K-Mart and Sears merged in an $11-billion deal based on the idea that combining the real estate value of the struggling stores would strengthen both.
Many retailers have over the past year shed their real estate footprint, finding the U.S. store-base too vast and too out of sync with the many American shoppers that no longer go to the mall.
By Lauren Hirsh for CNBC