Toys R Us pre-holiday filing backed by USD 3bn DIP - DEBTWIRE BROADCAST Debtwire journalists and analysts will discuss the challenges facing Toys ...

DEBTWIRE BROADCAST
 Toys R Us pre-holiday filing backed by USD 3bn DIP

Debtwire journalists and analysts will discuss the challenges facing Toys R
Us in its Chapter 11 restructuring. | 20 September 2017

AGENDA

   Opening Remarks and First Day Hearing:
      Pat Holohan, Court Reporter

   Background/History:
      Reshmi Basu, Associate Editor

   Financial Analysis:
      Philip Emma, Senior Research Analyst

   Legal Analysis:
      Joshua Friedman, Senior Legal Analyst

   Q&A

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OVERVIEW

   Toys R Us filed for Chapter 11 on 18 September with no proposed
    restructuring plan in place
   Toys R Us receives over USD 3.1bn of DIP financing
       Toys – Delaware and Toys Canada are borrowers under a USD 1.85bn DIP revolving
       credit facility and USD 450m DIP FILO term loan to finance North American debtors
       B-4 lenders are providing a USD 450m DIP TL to Toys – Delaware, which is also a
       borrower under intercompany DIP facilities
       True Taj noteholders provide USD 375m DIP to finance international entities
   Rapid succession of maturities, substantial debt service obligations
    and underinvestment combined with shift away from brick-and-
    mortar stores impeded liquidity

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THE COMPANY

   In 2005, Toys R Us was taken private by Kohlberg Kravis
    Roberts, Bain Capital and Vornado Realty Trust in a USD 6.6bn
    buyout

   Company is a toy and baby products retailer, generating 40% of
    its annual revenue in 4Q

   Toys R Us has about 1,700 stores and 257 licensed stores in 38
    countries, plus additional e-commerce sites

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THE DESCENT

   Significant debt burden

   Competition from peers

   Supply chain issues

                              5

FIRST DAY HEARING

   “We are all Toys R Us kids”

   Judge approves USD 3.1 billion DIPs on interim basis

   Second day hearing set for 10 October

   Tru Taj DIP objections overruled

   Time to mend vendor relationships, prepare for the holidays

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FINANCIAL ANALYSIS: SUMMARY

   Timing is everything: Toys had issues, but it seemed like it had time to
    address capital structure.

   Perfect storm – “bankruptcy” word uttered right at the point where
    company is heading into peak inventory inflows, peak vendor payables
    and peak of ABL need.

   The immediate issue is that AP rises by more than 50% from 2Q end to
    3Q peak. Did vendor contraction just accelerate an inevitability?

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FINANCIAL ANALYSIS: SUMMARY (CONT’D)

   Bigger problems: revenue declining from competition, margins
    contracting, expense cuts minimizing the drops, not eliminating it.

   LTM revenue $11.3bn, adjusted EBITDA $709m. Against a year ago
    revenue down 3.9% but adjusted EBITDA down 12%.

   Mix of problems: Toy business – Amazon effect, shift in how kids play.
    Baby business – babies still need diapers, but mail subscription is a
    better model. Fix needed to technology and strategy.

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FINANCIAL INSIGHTS: PRE AND POST-PETITION CAPITAL
                   STRUCTURE AND ESTIMATED RECOVERY VALUE
                                                                                                      Issue isn’t just the level of
                                                                                                      debt and maturities, but
                                                                                                      where debt resides in cap
                                                                                                      structure

                                                                                                      LTM Leverage:
                                                                                                      Toys-Delaware =       9.6x
                                                                                                      Toys Europe/Tru Taj = 4.9x
                                                                                                      Consolidated =       7.4x

                      SUMMARY OF TOYS R US CONSOLIDATING LTM RESULTS TO 2Q17                      Forecasts – how reliable?
                                  Consolidated   Toys-Delaware   TRU Taj LLC   Corporate (Est.)   40% of Revenue in 5 weeks post-
Net Sales                            11,320         7,842          3,813            (335)
                                                                                                  Thanksgiving. December 2017? Let
Gross Profit                         4,045          2,645          1,651            (335)
Gross Profit Margin                  35.7%          33.7%          43.3%           100.0%         alone 2018..2019..2020…
Adjusted EBITDA                       709            323            400              (14)
EBITDA Margin                        6.3%            4.1%          10.5%              -
                                                                                                  Monthly Forecasts – no store
                                                                                                  closure impact.
                                                                                                                                      9

LEGAL ANALYSIS: PRE-PETITION DEBT / DIP

   Complex capital structure
   USD 3.1bn in DIP financing
      ABL/FILO: USD 2.3bn (USD 1.85bn revolver and USD 450m FILO TL)
      TL: USD 450m
      Taj: USD 375m of incremental notes
    Pre-petition lenders/noteholders providing significant DIP
    loans
      Ad hoc group of Taj noteholders + ad hoc group of B-4 lenders
      B-2, B-3 lenders are not included
   Refinancing pre-petition ABL/limited milestones

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LEGAL ANALYSIS: CASE DYNAMICS

   Different type of valuation fight?
   Potential inter-creditor disputes
      Taj noteholders vs. TL lenders
      B-4 vs. B-2 & B-3
      Taj DIP noteholders vs. Taj pre-petition noteholders
   Unsecured creditor pushback?
      UCC constituency
      Closing stores / landlord issues
   Going concern sale option?
   Sponsors

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