Toys “R” Us filed a motion today in bankruptcy court to liquidate inventory and close all its stores. The retailer had filed for Chapter 11 bankruptcy in September 2017, resulting from vendors demanding cash payments in advance of merchandise shipments. At the time of the filing, the company struggled under a debt burden in excess of $5.0 billion, partially fueled by a $7.5-billion leveraged buyout executed in 2005. The bankruptcy filing became an immediate necessity as Toys “R” Us worked to build up inventory and continue operations going into the holiday season.
With the pending liquidation of the entire U.S. store portfolio looming, Kroll Bond Rating Agency (KBRA) re-examined its $537-billion coverage of 840 CMBS transactions to identify loan exposure to Toys “R” Us closures. KBRA identified 111 loans ($4.9 billion) secured by 234 properties with exposure to Toys “R” Us or Babies “R” Us. The largest individual exposure remains within the TRU 2016-TOYS transaction, a $494.5-million, single-borrower deal secured by 123 Toys “R” Us and Babies “R” Us; most of the stores secured by the loan are owned by Toys “R” Us.
Of most concern in terms of potential loan defaults is loans secured by properties that feature Toys “R” Us or Babies “R” Us as a tenant accounting for 50% of GLA or greater. Of the 111 loans within the Toys “R” Us cohort, 3 ($36.2 million) are secured by properties that are leased to the store as a single tenant, while 13 loans ($144.0 million) are secured by properties with Toys “R” Us or Babies “R” Us leases accounting for 50% or more of the GLA. These loans are at high risk of default once lease payments on the stores securing these loans cease.