Will debt restructuring fix Toys "R" Us' problems, or is it just delaying the inevitable?
Many were surprised when toy giant Toys “R” Us filed for bankruptcy in the US just over a month ago, after it appeared to go from strength to strength on the back of private equity investment 12 years ago.
With many commentators reviewing the company accounts, it’s become common knowledge that the business has struggled to repay the debt which it incurred during the private equity takeover – reported to be around $5bn. Like many businesses, Toys “R” Us implemented cost-cutting measures to try to service this debt, however this business that once ruled supreme simply couldn’t keep up with the new-found online businesses with a leaner supply chain and significantly smaller overheads.
Toys “R” Us filed for Chapter 11 protection in the US, the UK’s equivalent being a Company Voluntary Arrangement (CVA). This effectively means that due to financial difficulties, the company agrees to repay creditors a percentage of their outstanding debt over a period of time, from future profits or new funding. With Toys “R” Us having debtors such as Hasbro, and Mattel, it’s no surprise that various lenders have formed a syndicate to help turn the business around.
For UK companies, the official statement is that it’s “business as usual”, with the UK business owned separately to the North America branch. Whilst it is possible that it could bypass the UK for now, the UK branch is still suffering from the same market conditions that forced the US branch to enter the Chapter 11 – it’ll be interesting to observe how the UK company reacts, having seen its potential fate play out in the US.
Whilst Toys “R” Us currently has a little breathing space, it’s important to remember that the UK equivalent of a Chapter 11, the CVA, sees a significant number of businesses failing within two years of entering into the process. The reason often being that whilst debt restructuring can assist in the financial position, it’s often the business model that is flawed, and not adapting can ultimately leave them in the same place in the future.
Toys “R” Us must evolve and adapt, to keep up with newer companies such as Amazon. These online businesses have been built for the current market conditions – they’ve thrived in a competitive marketplace and don’t see declining footfalls as a negative, but a positive for the rise in e-commerce.
It doesn’t matter what market you’re in, or the size of your business – not keeping up with the times can take down even the largest businesses. The wave of digital music and streaming significantly knocked HMV, Blockbuster was pushed aside when Netflix and online streaming became the norm, and Kodak’s inability to adapt to the rise of digital photography left it virtually out of the race in today’s photography landscape.
When undertaking any investigation regarding a potential CVA, we ensure to understand the business model and the market demand to stop the business from re-entering an insolvency process when the same thing happens again. Whilst sometimes a restructuring of debt or an injection of funding can assist, it’s not always the case – only time will tell whether this is the case for Toys “R” Us.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
The information was correct at time of publishing but may now be out of date.