Some Toys `R’ Us vendors cutting shipments on bankruptcy fears

Some suppliers to Toys “R” Us Inc. have scaled back shipments to the retailer as it struggles to refinance debt and avoid a potential bankruptcy filing, according to people with knowledge of the matter.

The vendors are balking as Toys “R” Us continues talks with lenders over a new loan that would allow the company to stay open while it works out a recovery plan through bankruptcy proceedings, said the people, who asked not to be identified because discussions are private. The loan is being marketed by Lazard Ltd. to banks and existing creditors, said one of the people.

The Indianapolis area is home to three Toys "R" Us stores—in Castleton, Greenwood and at 9251 East Washington St.—and two Babies "R" Us stores.

Suppliers pulled back in part because the cost to insure their shipments to cash-strapped Toys “R” Us has become too expensive, said the people. Vendors often rank among creditors with the lowest priority for getting repaid if a company seeks court protection, and their decision on whether to continue shipping goods can play a large role in determining a retailer’s fate.

Representatives for Wayne, New Jersey-based Toys “R” Us and Kirkland & Ellis, which advises the company, declined to comment. Lazard didn’t immediately respond to messages. A possible bankruptcy was previously reported by CNBC, and Debtwire reported last week that the retailer was exploring a bankruptcy loan, known as debtor-in-possession financing.

Holiday rush

Toys “R” Us needs to find a financial solution quickly and resume shipments because the cash-strapped chain makes about 40 percent of its sales during the fourth-quarter holiday season, according to company filings. Much of its strategy revolves around getting exclusive products from key vendors, along with support for advertising and marketing.

The toy merchant has been seeking to refinance $400 million of debt that comes due next year. No decision about seeking court protection has been made, one person said.

Toys “R” Us has vexed private equity owners Bain Capital, KKR & Co. and Vornado Realty Trust, which loaded the retailer with debt in a $7.5 billion buyout more than a decade ago. Last year, the chain extended maturities on some of its borrowings, giving it more time to act on Chief Executive Officer Dave Brandon’s turnaround plan. He’s looking to spruce up stores with more toy demonstrations and other experiences, which would help give the chain an edge over online sites such as Amazon.com.

The chain’s revenue has continued to decline as it competes with industry giants Wal-Mart, Target and Amazon. It’s also contending with a broader shift in retail, with more purchases going online and toward experiences and home renovations. That’s sparked an increase in store closings and retail bankruptcies this year. During the toy merchant’s fourth quarter, which includes Christmas, same-store sales fell 2.5 percent in the U.S. and 4.9 percent internationally.

Some success

Still, Toys “R” Us remained profitable by some key measures, generating $790 million in earnings before interest, taxes, depreciation and amortization. That was the most since 2012. The company will report second-quarter results on Sept. 26.

As doubts about the company’s health mounted, the cost for debtholders to insure against a default by Toys “R” Us surged in the past week to levels that imply a more than 60 percent chance it won’t meet its obligations in the next year. Credit-default swaps expiring in June were trading at 36 percentage points upfront, or $3.6 million for every $10 million of debt insured, according to data provider CMA. That’s up from $300,000 per $10 million at the start of the month.

Hasbro Inc. is among toymakers that hasn’t curtailed shipments, spokeswoman Julie Duffy wrote in an email. “We continue to partner and ship, conducting business as usual, while managing our risk across all retailers to the appropriate levels,” Duffy wrote.