Good-bye Toys-R-Us

Any of us with kids has probably spent some time in a Toys-R-Us. The experience was usually less than exhilarating, and customers left mostly feeling exhausted and unfulfilled. Yesterday, the company took its last breath, announcing it couldn’t find the necessary financing and would be forced to liquidate its assets.

The global toy market does around $90 billion in annual sales. But the kids of today will probably never step foot in a brick-and-mortar retail toy store like Toys-R-Us. Online gaming and Internet shopping with retailers like Amazon (AMZN) are putting an end to that.

The end has been coming since 1998, when Walmart began to sell more toys than Toys “R” Us. The Amazons compounded those problems… and put toy stores on a crash course toward obsolescence.

In 2016, Toys “R” Us owed creditors more than $6 billion, most of which stems from a leveraged buyout back in 2005. A huge portion of that debt – $1.6 billion – was coming due in 2017 and 2018. With more than $1.3 trillion in junk debt coming due at the time, Toys “R” Us knew it had to cut to the front of the line if it wanted to find a willing lender.

Toys “R” Us is a private company. But its bonds traded publicly… And the bondholders had become far too complacent. As recently as last June, the company’s bonds maturing in October 2018 traded for more than par ($1,000). Bondholders were completely ignoring the risk in order to get its 7.3% yield. Even in August, the bonds traded for $980.

Then, reality set in. On September 7, the bonds fell 25%. About a week later, they traded for less than $400 per bond. By September 19, the company filed for Chapter 11 bankruptcy protection. It received a $3 billion lifeline while it tried to renegotiate the debt and reorganize the company. Management shut down some of the underperforming stores and continued to operate the remaining 1,600 locations in an effort to turn around its failing business. The bonds plummeted to less than $300.

The bonds are now worthless.

The company will close all of its U.S. stores. More than 30,000 people will lose their jobs. CEO David Brandon said he was “very disappointed with the result.”