Bankrupt Toys ‘R’ Us Gets Court Approval to Unload Stores

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Daniel Gill Washington Reporter Jay Horowitz Washington Managing Editor

By Daniel Gill

Toys “R” Us received bankruptcy court permission to close or sell its remaining stores in what the company’s lawyers described as the largest retail liquidation in U.S. history.

The company can conduct “going-out-of-business” sales for most of its remaining 735 U.S. stores and can also sell its Canadian stores with its best performing 200 U.S. locations as a going concern, according to the March 20 ruling by Judge Keith Phillips of the U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond.

Some creditors argued against the Wayne, N.J.-based company’s motions and suggested the court convert the swiftly moving case to a Chapter 7 liquidation. But Phillips said no such motion was properly before him.

Liquidating in Chapter 11, rather than converting the case to Chapter 7, is more efficient for realizing as much value from the chain as possible, Gregory Plotko, of Richards Kibbe & Orbe LLP, told Bloomberg Law.

Toys “R” Us will run out money, said Plotko, who represents creditors who have purchased claims in the case. In this way it’s similar to Sports Authority, Blockbuster, and Borders—all large retailers forced to liquidate when they were unable to reorganize in Chapter 11, he said.

And it looks like running out of money is the inexorable path of the toy store chain.

According to a motion it filed March 15, the “stark reality” is that Toys ‘R’ Us is projected to run out of cash in the U.S. in May 2018 based on its current burn rate of between $50 million and $100 million per month.

The lenders pushed for the Chapter 11 liquidation, the company’s lawyers told the court.

The primary secured creditors, known as B-4 lenders, have determined that liquidating the 735 remaining U.S. stores is the best way to maximize their recovery, according to the motion. There are currently 144 stores already in liquidation.

“The shock of the case is the size of the large debtor-in-position financing and critical vendor debt,” Plotko said.

There are around $415 million of administrative claims, an unusually high number, he said. Much of this amount is owed to vendors who supplied the chain during the holiday season.

The motion also seeks an administrative stay, barring the enforcement and collection of claims not authorized by a “wind-down budget,” referenced in but not attached to the motion. The budget was filed the night before the hearing. Some parties complained about having insufficient time to review it.

Paid on ‘Equal Footing’

The motion asks that administrative claim holders be stayed from actively seeking compensation, creating a “race to the courtroom” for what little money is left.

Phillips said that he didn’t see any need for an injunction and that all administrative claimants should get paid on “equal footing.” He told the debtor to put procedures for seeking administrative claims into the proposed order on the motions.

The court’s orders will be on an interim basis, pending further hearings expected in the near future.

“Things are happening so fast in this case,” the judge said.

The court said that it made sense to carve out payments from money due the secured creditors to pay administrative claimants necessary to effect the liquidation sales.

Dismal 2017 Holiday Season

The company highlighted its fourth quarter 2017 receipts as among the principal reasons it needs to liquidate. When Toys ‘R’ Us filed bankruptcy, it borrowed money, known as a debtor-in-possession financing, or a DIP loan. That was done to get it through the holiday season, which has historically amounted to about 40 percent of its annual revenue, according to the motion.

But the fourth quarter receipts didn’t amount to anywhere near its conservative estimates.

At only $81 million, fourth-quarter pretax earnings were $250 million below what was budgeted for the DIP loans, and more than $260 million less than the previous two holiday seasons.

The company also blamed big-box competition, like Target, Walmart and Amazon, for its poor showing. It said that these companies sold toys at low margins or as loss-leaders, something Toys “R” Us couldn’t afford to do, since selling toys is its sole source of income.

The case is In re Toys ‘R’ Us, Inc. , Bankr. E.D. Va., 17-34665, hearing 3/20/18 .

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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