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ToysRUs weighs potential bankruptcy

Toys 'R' Us struggles to restructure its debt

From Market Watch

Toys "R" Us Inc. has retained lawyers from Kirkland & Ellis LLP to help restructure $400 million in debt due next year, a person familiar with the matter said, the latest move by the toy chain as it struggles with growing online competition.

The Wayne, N.J.-based retailer has been burdened with debt since private-equity owners Bain Capital, KKR & Co. and Vornado Realty Trust took it private in 2005 for $6.6 billion. It has swapped debt coming due this year and next for longer-term debt with a higher interest rate, and analysts had expected it to do the same with a $400 million bond due next year.

Toys "R" Us could successfully restructure its debt without seeking bankruptcy protection, Wells Fargo analyst Tim Conder said in a research note. But he added lenders are becoming leery working with retailers given the number of bankruptcies and online competition from Inc. and others.

Toys "R" Us, which operates about 875 stores in the U.S. and another 765 abroad, has previously indicated it was working with bankers at Lazard on a potential debt refinancing.

Kirkland & Ellis's restructuring group, with more than 100 lawyers, has long been one of the go-to law firms for companies looking to revamp operations or to restructure their finances.

The law firm has represented a number of troubled retailers -- including Payless, Gymboree, BCBG Max Azria and rue21 -- that have sought bankruptcy protection within the past year. CNBC earlier reported that Toys "R" Us had hired Kirkland.

Toys "R" Us says it is looking at a number of options in managing its debt load, which stood at $5.2 billion in June. The company had a net loss of $36 million on revenue of $11.5 billion for the fiscal year ended Jan. 28. It has been unprofitable in each of the last four years.

"As we previously discussed on our first-quarter earnings call, Toys "R" Us is evaluating a range of alternatives to address our 2018 debt maturities, which may include the possibility of obtaining additional financing," spokeswoman Amy von Walter said. The company plans to update investors on the refinancing activities and other plans during a second-quarter earnings call later in September, she said.

In a research report released Wednesday, Fitch Ratings warned the company will continue to lose market share to Target, Wal-Mart and Amazon and need to invest in lower prices and its online operations. The ratings firm said Toys R Us "will not be able to grow out of its capital structure and will largely remain dependent on favorable credit markets to refinance debt on an ongoing basis." It rates the company's debt at CCC, which indicates it is a substantial credit risk.

Toys "R" Us said in June that sales fell 4.9% for the quarter ended April 29, compared with the year-earlier period. The decline followed a weak holiday season for the company, a critical period in which sales at U.S. stores open at least a year fell 2.5%.

The sales have recently been hit by tough competition for baby products, as well as weak performances by some of its top brands such as Lego AS. Lego earlier this week reported its first decline in sales in 13 years and said it would cut 8% of its workforce.

Another toy maker, Mattel Inc., replaced its chief executive earlier this year after a slide in holiday sales.


PaulZiobro For Market Watch

Soma Biswas contributed to this article.

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