We Didn’t Kill Toys ‘R’ Us, Solus Tells Investors

(Bloomberg) -- Solus Alternative Asset Management LP didn’t kill Toys “R” Us Inc., the hedge fund said in a letter to its investors after coming under pressure for its investments in the liquidating retailer.

“Solus did not force Toys ‘R’ Us to liquidate,” Chief Investment Officer Christopher Pucillo said in the Sept. 6 letter seen by Bloomberg News. “It was the culmination of a host of factors, including a decade-plus of excessive leverage, mismanagement and the increasing effects of competition from the likes of Amazon and Walmart.”

The two-page letter lays out a timeline and narrative to rebut allegations that the refusal of Solus and other creditors to compromise on their investments forced the company to wind down when it could have lived on through a sale.

New York-based Solus invested $20 million in a Toys “R” Us loan before its bankruptcy and added stakes in its senior debt after the Chapter 11 filing, according to the letter. As the company closes its operations, Solus has attracted criticism from worker groups who say they deserve hardship pay after losing their jobs and that Solus and other lenders share the blame for the company’s failure to restructure.

The fired employees have been pressuring Solus investors, including the New Jersey’s pension fund manager to reconsider their relationships with the firm, according to people familiar with the effort.

A spokesman for New Jersey’s Office of the Treasurer said the state doesn’t comment on its investment strategy. A representative for Solus declined to comment on the letter or the firm’s role in the Toys “R” Us bankruptcy. An external representative for Wayne, New Jersey-based Toys didn’t respond to a request for comment outside of normal business hours in New York.

Solus, which has about $6 billion in assets under management, pointed to the complexities of blaming any one party for the Toys “R” Us shutdown. By the time the firm put money into the retailer, it was struggling under more than $5 billion in debt from its KKR & Co. and Bain Capital buyout in 2005 and the complex financing deals that followed.

The investment firm didn’t cite the buyout in its letter, but detailed how Toys “R” Us was put in a financial bind by the structure of its debt. Its assets had been pledged into numerous loans and other financing arrangements. A master lease that governed most of its stores meant it was tough to shrink the company’s footprint.

‘Out of Options’

Toys “was out of options" by March 2018, Solus wrote. It was losing $100 million every month and looked like it would exhaust $3 billion of a new round of funding that Solus contributed to after its bankruptcy. A sale offer from Sycamore Partners, which Bloomberg News reported in June, would have subordinated existing debt with new financing, making it a nonstarter, Solus said.

Solus says it couldn’t have determined the fate of Toys “R" Us even it wanted to. Its stake in the company’s most senior loan was around 8 percent, whereas more than a majority of the debt held would be needed to make the kind of unilateral decisions needed to force a wind-down. On the contrary, it said, the fund made concessions, including agreeing to waive a default on the bankruptcy loan that bought it more time to try to avoid liquidation.

The lenders with control over the master lease, on the other hand, were unwilling to negotiate, refusing to discuss possible rescue plans that would involve store closures, Solus said in the letter without naming those lenders.

Solus has most likely made money on its investment in Toys “R” Us. The bankruptcy loan it helped fund will be repaid in full, and it will also earn a return on holdings of the pre-petition debt it doubled down on during the bankruptcy when prices were low.

©2018 Bloomberg L.P.