Opinion At toys 'R' us, bankruptcy was painful, but not for all

Last spring, Toys R Us, struggling in the face of competition, wanted to refinance about $200 million in debt.

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At toys 'R' us, bankruptcy was painful, but not for all play

At toys 'R' us, bankruptcy was painful, but not for all

(NY Times)
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A year and a messy bankruptcy later, Toys R Us is expected to pay as much as $348 million for the dozens of bankers, lawyers and consultants that tried to fix its problems.

The giant payout, detailed in company documents released Friday, shows how lucrative corporate bankruptcies can be for professionals, while leaving many workers and creditors with scraps.

Toys R Us’ swift downfall has been particularly painful for the company’s more than 30,000 employees, who are losing their jobs as the company shuts its doors across the United States in the next few weeks.

The store workers say they will not receive severance, even though many say they were originally promised modest payouts. In the final days, Toys R Us is letting some employees be paid full time but not requiring them to come into work.

“This aggravates me so much,” said Tracy Forbes, a manager at a Babies R Us store in Phoenix. “These people are getting rich, and we are getting nothing after keeping this company going for 60 years.”

For creditors, it is all about the pecking order.

Vendors are fighting to get paid for their toys, and landlords are scrambling to find new tenants for the hulking stores that Toys R Us is leaving behind. Bankruptcy professionals typically sit near the top and are largely assured of getting paid.

The high cost of bankruptcy has been an issue for years. The fees in the Lehman Bros. case topped $1 billion two years after the investment bank filed the largest corporate bankruptcy case in history and help set off the global financial crisis in 2008.

“The fees have been increasing, and there is no effective means to control them,” said Lynn LoPucki, a bankruptcy professor at the University of California, Los Angeles.

Companies can choose where they want to file for bankruptcy. And LoPucki said bankruptcy judges were reluctant to push back on fees, fearing lawyers would choose to file big cases elsewhere.

Toys R Us, based in Wayne, New Jersey, filed its Chapter 11 case in federal court in Richmond, Virginia, which has a reputation for approving large professional fees.

Toys R Us bankruptcy lawyers from Kirkland & Ellis said in a court filing last year that they were charging as much as $1,745 an hour in the case. That was 25 percent more than the average highest rate in 10 of the largest bankruptcies in 2017, according to an analysis by The New York Times.

Bankruptcy professionals say that working to reorganize or liquidate a company is time-consuming, complicated and intense. Toys R Us is made up of multiple corporate entities — in the United States and internationally — that have hired lawyers and advisers.

All of that has added up to a big bill. So far, the company said, it has shelled out $108 million on professional fees. It expects to spend as much as $348 million as a result of the bankruptcy, according to the company documents.

Toys R Us collapsed quickly, going from a potential turnaround play to a costly liquidation.

With cash tight, the company wanted last spring to take some of the pressure off by refinancing about $200 million of its total $5 billion in debt. But when word got out that Toys R Us had hired restructuring advisers, the company’s vendors were spooked heading into the crucial Christmas season.

By September, Toys R Us said it had no choice but to file for bankruptcy.

The company had originally hoped to shed some of its debt and keep operating. But after dismal holiday sales, the Toys R Us lenders began to question whether the company had a future and threatened to pull back on financing.

In March, the company said it would liquidate thousands of United States stores and lay off all its workers.

Toys R Us’ problems date to 2005, when private equity firms Bain Capital and Kohlberg Kravis Roberts and real estate firm Vornado Realty Trust acquired the company in a $6.6 billion leveraged buyout.

Saddled with huge debt, Toys R Us had a difficult time competing with Walmart and Amazon. Loan payments were sapping cash that Toys R Us could have spent on updating its cavernous stores and building out its website.

Forbes’ last day at the Phoenix store is June 30. The company, she says, will stop contributing to her 401(k) account next week. Forbes says she is also owed six weeks of vacation but will not be paid for it.

This week, she traveled to Washington, D.C., with the labor advocacy group OUR to lobby members of Congress on the need to protect severance in bankruptcy cases. “If we can’t get severance from Toys R Us, we have to stop it happening from someone else,” Forbes said.

This article originally appeared in The New York Times.

MICHAEL CORKERY © 2018 The New York Times

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