MEMBER ALERT: Toys“R”Us Bankruptcy Proceedings

March 15, 2018 |The purpose of this Member Alert is to inform Toy Association manufacturer members of recent court filings related to the Toys“R”Us bankruptcy proceedings. The Toy Association will continue to monitor developments closely and share any relevant news as quickly as possible. Members can access key Toys“R”Us bankruptcy documents on Prime Clerk’s website.

Earlier today, Toys“R”Us Requested Court Approval to [Docket Nos. 2050 and 2051]:

(i)Authorize the debtors to wind down U.S. operations;

(ii)Authorize the debtors to close U.S. stores;

(iii)Establish bidding procedures for the sale of the debtors’ Canadian equity;

(iv)Enforce an administrative stay; and

(v)Grant expedited relief

On March 15, 2018, Toys”R”Us filed two motions with the bankruptcy court in Richmond, VA under Chapter 11 proceedings. The first motion (the “Wind Down Motion”) made it official that Toys”R”Us plans to liquidate its U.S. operations and conduct a going-concern sale of its interest in the Canadian operations. The second motion requested the court to grant expedited relief and set a deadline for objections to these motions to be filed by March 20, 2018.

In the filings, Toys”R”Us stated that 2017 holiday sales came in well below worst-case estimates including Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) approximately $250 million below debtor-in-possession (DIP) budget projections and more than $260 million below 2015 and 2016 EBITDA. Toys”R”Us attributed the poor sales performance to a combination of factors including: delays and disruption in reopening its supply chain; competition from other retailers; a greater-than-expected decline in sales following the bankruptcy filing; and the inability to compete online with attractive pricing or shipping terms.

According to the filings, plans to restructure the U.S. operations into fewer and smaller stores failed to materialize because no deals could be reached with its lenders for adequate funding. In addition, the earnings shortfall triggered covenant defaults which were not waived by all the DIP lenders. The court filings indicate that Toys”R”Us in the U.S. without additional funding would run out of cash by May 2018. As a result, it determined the best way for the DIP lenders to maximize their recoveries is for an orderly liquidation.

Toys”R”Us continues to look for possible ways to save a limited number of U.S. stores and is in discussions with interested parties about combining the sale of approximately 200 U.S. side-by-side stores with the sale of the Canadian operations. The detailed procedures to be followed include a bid deadline of March 26; an auction date of March 29, if needed; a hearing on April 12 to designate the successful bidder; and closing of the sale on April 16.

In conjunction with the plans to wind down the U.S. operations, termination notices to employees in the U.S. were issued on March 14 allowing for these employees to be paid a minimum of 60 days.

The filings also allow for the continuance for 60 days of the shared services relied upon by the international (Canada, Europe, and Asia) operations. Several companies are in discussions to be possible buyers of the company’s operations in Europe and Asia Pacific.

Toys”R”Us is actively seeking ways to mitigate the potential adverse impact the wind down of the U.S. operations may have on the international operations, including the ability to continue its private label business, impairment of intellectual property and the loss of shared IT, communications, global branding, and other shared services.

Important Reminder – Claims Filing Deadline

The deadline for filing claims against Toys”R”Us remains April 6, 2018. The same deadline applies to claims against Toys”R”Us Canada. U.S. claims and Canada claims must be filed separately.

Members with questions about this case are encouraged to visit the Toys“R”Us Restructuring Information page on The Toy Association website or contact Paul Vitale, executive vice president of finance and operations at The Toy Association.