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Online competition, long-term debt sends Toys R Us to Chapter 11

Toys R Us is among the world's largest toy store chains, yet it has now filed for Chapter 11 bankruptcy protection. What brought about the company's difficulties?

According to the New York Times' DealBook, the combination of factors included heavy competition from online retailers, a long-term debt totaling over $5 billion, and a looming $400 million debt payment.

Companies including Kohlberg Kravis Roberts, Bain Capital and Vornado Realty Trust purchased Toys R Us in 2005 in a leveraged buyout costing about $6 billion. It still has over $5 billion in long-term debt and its 2018 debt payment of $400 million was coming due soon. After burning through much of its cash, the company hired advisors to help come up with a Chapter 11 plan to reorganize the company's debts.

A group of lenders led by JPMorgan Chase has agreed to provide $3 billion in loans that will allow it to continue to pay its employees and suppliers.

Toys R Us also owns Babies R Us, and both have struggled to compete with online retailers like Amazon and discount stores like Walmart. This has been the case for many retailers and has resulted in a wave of bankruptcies this year among familiar brands such as Gymboree, Payless ShoeSource and teen clothier rue21. DealBook notes that other retailers have been forced to close stores and lay off workers in an effort to cut costs so they can compete with online retailing.

So far, Toys R Us and Babies R Us have not closed any of their roughly 1,600 stores worldwide. Operations remain as usual.

"Today marks the dawn of a new era at Toys R Us, where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way," said the company's chairman and CEO.

In a business bankruptcy, there are often a number of different factors at play. The question of why a company ends up needing bankruptcy protection is an interesting one, but it is secondary to the question of how that protection can help the business recover from lean times and thrive in the future. An attorney experienced in business bankruptcy can help you analyze the prospects and determine how a Chapter 11 reorganization could help your organization.

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