Toys 'R' Us files for bankruptcy ahead of holiday season

The Chapter 11 filing is among the largest ever by a specialty retailer and casts doubt over the future of its about 1,600 stores and 64,000 employees. It comes just as Toys 'R' Us is gearing up for the holiday shopping season, which accounts for the bulk of its sales.

"While today's decision does not necessarily mean it is game over for Toys 'R' Us, it brings to a close a turbulent chapter in the iconic company's history," said Neil Saunders, managing director of GlobalData Retail.

Toys 'R' Us received a commitment for over $3 billion in debtor-in-possession financing from lenders including a JPMorgan-led bank syndicate and certain existing lenders, said the Wayne, New Jersey-based company, which also operates the Babies 'R' Us chain.

The financing, subject to court approval, reassures its suppliers they will get paid for their Lego building blocks and Barbie dolls that are being shipped for the holiday season.

"We expect that the financial constraints that have held us back will be addressed in a lasting and effective way," Chief Executive Dave Brandon said.

"Together with our investors, our objective is to work with our debtholders and other creditors to restructure the $5 billion of long-term debt on our balance sheet."

Its Canadian unit intends to seek protection in parallel proceedings under the Companies' Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice, Toys 'R' Us said in a statement.

Operations outside of the United States and Canada, including about 255 licensed stores and joint venture partnerships in Asia, which are separate entities, are not part of the bankruptcy proceedings, Toys 'R' Us said.

The company's Toys 'R' Us and Babies 'R' Us stores and e-commerce sites around the world are open for business, it said.

The company is saddled with debt from a $6.6 billion buyout in 2005 led by KKR & Co LP and Bain Capital LP, together with real estate investment trust Vornado Realty Trust.

Toys 'R' Us has bonds coming due next year that have lost half their value this month, according to Thomson Reuters data, as investors have grown concerned about a possible bankruptcy.

The company opened a temporary store in New York City's Times Square this year to capture more holiday shoppers, almost two years after it closed its flagship store barely a block away, driven out by high rents.

"Vendors have cut them off based upon the rumors of the filing which has not been refuted," said Jay Indyke, a bankruptcy attorney with the Cooley law firm.

With assets of $6.9 billion based on its most recent annual report, it's the second-largest retail bankruptcy, trailing the filing in 2002 by Kmart, which had $14.6 billion in assets, according to research firm Bankruptcydata.com.

More than a dozen significant retail chains have filed for bankruptcy this year. Among them were Perfumania Inc, apparel chains rue21 Inc and Gymboree Corp, discount shoe chain Payless Holdings LLC and designer clothing chain BCBG Max Azria Global Holdings LLC.

Major retailers including Macy's Inc and Sears Holding Corp have closed hundreds of locations as they struggle to compete discounters such as Wal-Mart Stores Inc and Amazon.com Inc. Amazon's recent acquisition of high-end grocer Whole Foods Markets Inc stirred speculation that the online giant will use its pricing power and huge reach among U.S. consumers to go after market share of traditional brick-and-mortar grocers.

Toys 'R' Us is the second-largest toy seller in the United States behind Amazon, according to consulting firm Kloster Trading Corp.

"What they have going for them is they are the last major player in their market," said David Berliner, a partner and restructuring specialist with BDO Consulting.

"The vendors don't want to see them fail, so I think they have a good opportunity to survive."