Toys ‘R’ Us Sale of Asia Unit Threatened by Solus-Cerberus Brawl

(Bloomberg) -- The sale of Toys “R” Us’s last and most valuable remaining asset, its Asia operations, has become caught up in a battle between two groups of hedge funds over the future use of the brand by stores in that region.

One group of funds, including Cerberus Capital Management and Cyrus Capital Partners, owns notes issued by the Asian stores and would be the lead bidder for the shops. Another group, which includes Solus Alternative Asset Management and affiliates of Oaktree Capital Management, claims control over the rights to the Toys “R” Us name, because it was collateral on loans the funds had made to the company.

The second group, known as the B-4 lenders, believes the Asian stores aren’t paying enough for the use of the brand and has reserved its right to sue whoever wins the auction for the shops, according to court documents. In court papers on Thursday, they asked a judge to rewrite the auction rules and argued that any bidders in the sale needs to negotiate with them over how much the Asian business will pay to call itself Toys “R” Us.

In their objection, the B-4 lenders used the technical language of bankruptcy law to issue a veiled warning to any bidders who try to top the $760 million opening offer made by the Cerberus group, which is known as the Taj lenders.

“Bidders, therefore, will have to understand the contractual terms and causes of action in deciding how much to bid and whether to engage in direct discussions” with the B-4 lenders, the group said in its filing.

Taj noteholder attorney Samuel Lovett said the group would continue to press forward with their plans for the Asia business.

“The B-4 lenders’ threats are not new and have no merit,” said Lovett, who is with the law firm Paul, Weiss, Rifkind, Wharton & Garrison. “The Taj noteholders are focused on reorganizing the Asian operations as a going concern.”

Aug. 30 Hearing

The two sides are scheduled to be in court Aug. 30 over the rules proposed to govern the auction.

The Taj lenders would make a so-called “credit bid” by using their senior secured notes in the Asia business rather than cash. Should no higher offers come in, they would automatically win ownership of the unit during an auction next month in New York, according to court documents. Noteholders eligible to participate include York Capital Management Global Advisors LLC, Barclays Bank Plc and Cerberus Capital Management LP, related court papers show.

By naming the lender group as the so-called stalking horse bidder, Toys is attempting to set the ground floor for the auction.

After filing for bankruptcy last year, Toys struggled to reorganize its complicated debt structure and save the company’s U.S. operations. When that effort failed earlier this year, Toys began liquidating its worldwide operations, selling its Canadian and central European businesses and shutting down is U.S. stores.

The case is Toys “R” Us, 17-34665, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond)

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