the Toys R Us Chapter 11 filing

Toys R Us (TRU) is no longer a publicly traded company.  After a very rocky period of being buffeted by Wal-Mart, Target, and with Amazon beginning to pile on, TRU was taken private in 2005.

Its fortunes haven’t improved while in private equity hands.  In addition, as private equity projects usually do, TRU acquired a huge amount of debt, as well.  In a situation like this, suppliers are typically very antsy about the possibility of a bankruptcy filing.  That’s because trade creditors have little standing in bankruptcy court; they usually can’t get either their merchandise back or payment on any receivables due.

When a reent press report appeared that TRU was considering Chapter 11, suppliers apparently refused to send any more merchandise to TRU on credit, demanding payment in full upfront instead.  The company didn’t have the cash available to pay for enough merchandise to fill its stores in advance of the all-important holiday season.   So it filed for Chapter 11 bankruptcy.

None of this is particularly strange.  Years ago, one of my interns did a study that showed that even in the early 1990s TRU was losing market share to WMT and TGT, and was making due mostly by taking share from mom and pop toy stores.  Then the last mom and pops closed their doors and TRU’s real trouble began.

What dd surprise me was the report in today’s Financial Times that the company’s notes due in 2018 were trading at close to par a couple of weeks ago–vs. $.28 on the dollar now.

How could this be?  Holders were apparently betting that TRU would limp through the holidays and then refinance its 2018 debt obligations–allowing these “investors” to collect a coupon and exit if they so chose.

The fact that professional investors would commit money to this threadbare investment thesis shows how desperate for yield they are in fixed income land at present.  As/when rates begin to rise, things could easily get ugly, fast.