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DEBTWIRE BROADCAST Toys R Us pre-holiday filing backed … R Us Webinar Working Copy PH...
Transcript of DEBTWIRE BROADCAST Toys R Us pre-holiday filing backed … R Us Webinar Working Copy PH...
DEBTWIRE BROADCASTToys R Us pre-holiday filing backed by USD 3bn DIP
Debtwire journalists and analysts will discuss the challenges facing Toys R Us in its Chapter 11 restructuring. | 20 September 2017
AGENDA
Opening Remarks and First Day Hearing:Pat Holohan, Court Reporter
Background/History: Reshmi Basu, Associate Editor
Financial Analysis:Philip Emma, Senior Research Analyst
Legal Analysis:Joshua Friedman, Senior Legal Analyst
Q&A
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OVERVIEW
Toys R Us filed for Chapter 11 on 18 September with no proposed restructuring plan in place
Toys R Us receives over USD 3.1bn of DIP financing Toys – Delaware and Toys Canada are borrowers under a USD 1.85bn DIP revolving credit facility and USD 450m DIP FILO term loan to finance North American debtors
B-4 lenders are providing a USD 450m DIP TL to Toys – Delaware, which is also a borrower under intercompany DIP facilities
True Taj noteholders provide USD 375m DIP to finance international entities
Rapid succession of maturities, substantial debt service obligations and underinvestment combined with shift away from brick-and-mortar stores impeded liquidity
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THE COMPANY
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In 2005, Toys R Us was taken private by Kohlberg Kravis Roberts, Bain Capital and Vornado Realty Trust in a USD 6.6bn buyout
Company is a toy and baby products retailer, generating 40% of its annual revenue in 4Q
Toys R Us has about 1,700 stores and 257 licensed stores in 38 countries, plus additional e-commerce sites
THE DESCENT
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Significant debt burden
Competition from peers
Supply chain issues
FIRST DAY HEARING
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“We are all Toys R Us kids”
Judge approves USD 3.1 billion DIPs on interim basis
Second day hearing set for 10 October
Tru Taj DIP objections overruled
Time to mend vendor relationships, prepare for the holidays
FINANCIAL ANALYSIS: SUMMARY
Timing is everything: Toys had issues, but it seemed like it had time to address capital structure.
Perfect storm – “bankruptcy” word uttered right at the point where company is heading into peak inventory inflows, peak vendor payables and peak of ABL need.
The immediate issue is that AP rises by more than 50% from 2Q end to 3Q peak. Did vendor contraction just accelerate an inevitability?
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FINANCIAL ANALYSIS: SUMMARY (CONT’D)
Bigger problems: revenue declining from competition, margins contracting, expense cuts minimizing the drops, not eliminating it.
LTM revenue $11.3bn, adjusted EBITDA $709m. Against a year ago revenue down 3.9% but adjusted EBITDA down 12%.
Mix of problems: Toy business – Amazon effect, shift in how kids play. Baby business – babies still need diapers, but mail subscription is a better model. Fix needed to technology and strategy.
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FINANCIAL INSIGHTS: PRE AND POST-PETITION CAPITAL STRUCTURE AND ESTIMATED RECOVERY VALUE
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Issue isn’t just the level of debt and maturities, but where debt resides in cap structure
LTM Leverage:Toys-Delaware = 9.6xToys Europe/Tru Taj = 4.9xConsolidated = 7.4x
Consolidated Toys-Delaware TRU Taj LLC Corporate (Est.)
Net Sales 11,320 7,842 3,813 (335)
Gross Profit 4,045 2,645 1,651 (335)
Gross Profit Margin 35.7% 33.7% 43.3% 100.0%
Adjusted EBITDA 709 323 400 (14)
EBITDA Margin 6.3% 4.1% 10.5% -
SUMMARY OF TOYS R US CONSOLIDATING LTM RESULTS TO 2Q17 Forecasts – how reliable?40% of Revenue in 5 weeks post-Thanksgiving. December 2017? Let alone 2018..2019..2020…
Monthly Forecasts – no store closure impact.
LEGAL ANALYSIS: PRE-PETITION DEBT / DIP
Complex capital structure
USD 3.1bn in DIP financing
ABL/FILO: USD 2.3bn (USD 1.85bn revolver and USD 450m FILO TL)
TL: USD 450m
Taj: USD 375m of incremental notes
Pre-petition lenders/noteholders providing significant DIP loans
Ad hoc group of Taj noteholders + ad hoc group of B-4 lenders
B-2, B-3 lenders are not included
Refinancing pre-petition ABL/limited milestones
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LEGAL ANALYSIS: CASE DYNAMICS
Different type of valuation fight?
Potential inter-creditor disputes
Taj noteholders vs. TL lenders
B-4 vs. B-2 & B-3
Taj DIP noteholders vs. Taj pre-petition noteholders
Unsecured creditor pushback?
UCC constituency
Closing stores / landlord issues
Going concern sale option?
Sponsors
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