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Relevant Document:
Notice of Agenda

Judge Keith Phillips approved all of the Toys “R” Us debtors’ first day motions at a hearing today in the Bankruptcy Court for the Eastern District of Virginia after the debtors filed for chapter 11 bankruptcy protection on Sept. 18. The motions were all uncontested, except for the Debtors’ DIP financing motions, which garnered objections from certain prepetition creditors who were not allowed to participate in the financing opportunity and landlords concerned with maintaining the status quo pending the final hearing. Judge Phillips received into evidence the debtors’ first day declarations and heard testimony from David Kurtz of Lazard, the debtors’ financial advisor. Judge Phillips granted the debtors’ DIP financing motions on an interim basis and overruled the objections thereto, noting that all rights were reserved as to opposition to the final DIP order. Judge Phillips also granted all of the debtors’ other first day motions, none of which elicited any objections. A second day hearing in the cases has been scheduled for Oct. 10.

Among the objecting creditors that were not allowed to participate in DIP financing were funds Owl Creek (owning more than 12% of the prepetition Taj notes), River Birch (owning approximately 5.8% of the prepetition Taj notes) and a group of B2/B3 lenders represented by Arnold & Porter Kaye Scholer. Notably, Owl Creek was one of the support parties to the 2016 exchange offer and private placement that led to the issuance of the company’s existing Taj notes.

Our full live coverage of the hearing is available HERE.

At the outside of the hearing, Joshua Sussberg of Kirkland & Ellis, on behalf of the debtors, gave a presentation on the history of Toys “R” Us - from its beginning in the basement of founder, Charles Lazarus, following WWII to its acquisition in 2005 by Bain Capital, KKR and Vornado. Sussberg discussed the market pressures that led the company to begin exploring strategic alternatives in 2016 and the Sept. 6 CNBC story that mentioned the word, “bankruptcy” and led 40% of the debtors’ vendors to demand immediately cash on delivery terms, which led to the rapid acceleration of Toys’ timeline to file for bankruptcy. Sussberg’s opening statement even included a sing along of the company’s ubiquitous theme song and the statement “we are all Toys “R” Us kids.” Sussberg also referenced in his opening market pressures facing the retail industry, saying “the company is operating in a retail apocalypse, what the company needs is an ability to capitalize itself and to ensure that the latest and greatest toys are available in the company’s stores all across the world.”

Chad Husnick, also of Kirkland & Ellis, then presented the debtors’ two DIP financing motions. Husnick explained that the company’s corporate structure is divided into two silos: the TRU Taj side - the company’s international operations except for Canada and the U.S. - and the North American silo, which involves coordination with CCAA reorganization proceedings in Canada. Each silo is financed separately, Husnick highlighted, and there is no cross-collateralization between the silos but for certain rent and licensing arrangements and a guaranty by Wayne Real Estate Parent Company of the B4 term loans issued by Toys “R” Us Delaware. “One of the goals was to preserve the sanctity of the separate silos and thus we negotiated for separate financing, and also to resist the urge of creditors to reach over and grab collateral from the other side,” Husnick noted.

Husnick explained that the debtors are seeking authority to borrow a total of $3.125 billion in DIP financing, with $2.3 billion coming from the North American DIP ABL/FILO facilities, $450 million from the North American DIP term loan and $375 million from the TRU Taj DIP facility. With respect to the Taj DIP, Husnick noted that the debtors had entered into a forbearance and waiver agreement with more than 70% of the Taj noteholders, represented by Paul Weiss, by which the noteholders agreed to waive certain defaults that would have occurred upon the bankruptcy filing. The prepetition Taj noteholder group providing the Taj DIP financing is represented by GLC as financial advisor alongside legal advisor Paul Weiss and the prepetition Delaware B4 term loan lender group providing the $450 million North American DIP term loan is represented by Wachtell Lipton as legal counsel and advised by Houlihan Lokey as financial advisor.

David Kurtz of Lazard, the debtors’ financial advisor, took the stand following Husnick’s presentation and Andrew McGaan of Kirkland & Ellis conducted his direct examination. Kurtz explained why the debtors chose not to pursue a strategy of simply extending the maturities on debt coming due in 2018. “The company pays too much interest and does not have sufficient capital and liquidity to make appropriate investments in its stores and technology,” Kurtz first noted. Continuing, Kurtz reasoned that if the company had waited to go through a wholesale restructuring two years from now, it would have been a weaker business and harder to restructure as a going concern. In addition, to accomplish an extension of the 2018 maturities, the company would have had to utilize $600 million of unencumbered real estate and, in effect, would be borrowing money against those assets without adding any liquidity with those assets then no longer available to support DIP financing, which the company would undoubtedly need in the future. Based upon those considerations, the board determined that the “kick the can” strategy was not appropriate, Kurtz testified.

Kurtz also testified that, after considering other alternatives, the debtors decided in late August to begin arranging DIP financing. Sussberg noted earlier that the company began to look at the DIP financing alternative at that time as a contingency plan because that was what a “responsible company” would do. The company’s timeline was expedited after the Sept. 6 CNBC news report. Prior to that report, the debtors were attempting to avoid filing the cases ahead of the holiday season but trade credit contracted almost immediately after the story, according to Sussberg. Since then, the debtors and Lazard have been working around the clock to put the DIP financing in place. Kurtz explained that the debtors developed a series of basic principles for how to approach the marketplace, emphasizing an open, competitive process aimed at fully committed financing. In addition, the company sought to ensure the facilities did not involve cross-collateralization or cross-lending. “It was important to respect the integrity of the company’s prepetition capital structure,” Kurtz testified.

There were 21 potential lenders that signed non-disclosure agreements, which included approximately 30 institutions as some of the NDAs were signed by groups of lenders working together, Kurtz said. With respect to the ABL/FILO facility, there was only one bank that was willing to underwrite the entire $2.3 billion, Kurtz said, the other seven banks said that they would need a partner. Accordingly, the company formed two other coalitions and, at the end of a competitive process in which the coalitions competed against the bank, the JPMorgan-led financing ended up as the winner and provided financing on the most favorable terms, he added. In addition, Kurtz testified that the debtors received five competitive proposals for the term loan DIP facility, with the B4 lender group prevailing because the group’s pricing was within the range of reasonableness and the lender group would allow their prepetition collateral to be primed by the DIP facility. Similarly, out of four proposals, the debtors elected to go with the group of Taj noteholders for the Taj DIP facility because that proposal was within the range of reasonableness and would avoid a priming fight.

Objections and Responses

The first objection to the debtors’ DIP financing came from River Birch, whose counsel, Paul Silverstein of Andrews Kurth, requested to cross-examine Kurtz. Silverstein, whose arguments were later echoed by additional objecting parties, said his client owned between 5% and 6% of the Taj notes and was not allowed to participate in the Taj DIP facility. Silverstein said his client had told advisors to the Taj DIP lenders that the fund would be willing to participate on a pro rata basis but Kurtz noted that he was not aware of this. Kurtz acknowledged that not all 12% Taj noteholders were afforded the opportunity to participate in the Taj DIP, that the $375 million Taj piece primes the remaining $583 million of 12% Taj notes and that Lazard has not completed a valuation of the Taj entity. He added however that the provider of the financing could feasibly decide not to lend if River Birch were ordered to be allowed in - something that would be out of the debtors’ control.

Husnick for the debtors then argued that River Birch and other Taj noteholders are adequately protected through interest payments, replacement liens on all of the collateral to secure any diminution in value and reinvestment to preserve the value of the European assets. River Birch’s lack of involvement in the financing was a result of it “sitting on its hands” while others were working, according to Husnick. The debtors’ counsel also noted that, when looking at the Taj notes indenture, the debtors are allowed to do certain things with the consent of a majority or two-thirds of the noteholders. It cannot be that a minority of noteholders can object to releasing collateral when the indenture allows two-thirds of those noteholders to consent to the release outside of bankruptcy, Husnick said. Further, the debtors should not be penalized because River Birch was unable to get into a group, Husnick argued.

Samantha Martin of Stroock & Stroock for Owl Creek, concurred with River Birch’s position. Martin noted, however, that her client holds more than 12% of the Taj notes and, unlike River Birch, directly reached out to Lazard, in addition to other involved parties, regarding providing DIP financing support at Taj. Martin said her client believes that a supermajority cannot consent to priming liens.

Michael Messersmith of Arnold & Porter Kaye Scholer, on behalf of the B2/B3 term loan lenders, said that his clients have serious concerns regarding the adequate protection being provided in the North American debtors’ DIP financing and the fact that the B4 lenders are exclusively providing the $450 million term loan DIP. His clients are willing to participate on a pro rata basis and he said that it’s notable that B4 lenders do not represent more than 50% of the overall credit facility. The concern - Messersmith said - is that the agent, Bank of America, has allowed for a priming facility without a majority of noteholders consenting. Counsel to the Taj indenture trustee responded that the trustee has no basis to object to the priming at this time.

Several landlords also objected to the debtors’ proposed DIP financing, with Robert LeHane of Kelley Drye for landlords of approximately 45 locations saying that his clients want to ensure that the debtors preserve the status quo as to the leasehold interests. LeHane took issue with the DIP lenders’ default and collateral access rights. Counsel from Ballard Spahr and Allen Matkins later specified that, for their clients, the landlord issues are discrete and the DIP has their general support. Counsel argued that barring specific exceptions, there are not typically liens granted on leases in these situations, just on proceeds. He said he has exchanged emails with debtor counsel and B4 lenders and believes they have reached an agreement on language acceptable to all. Counsel also said, however, that they are still fighting with one lender who wants different language. Regardless, he said “let’s get on with getting the debtor money today.” On behalf of another group of landlords, Jennifer McLain McLemore from Christian & Barton also objected and said that there are landlords who have concerns that everyone who does not object today will be primed.

Counsel for Mattel spoke in support of the DIP financing, stressing that the debtors’ supply chain is incredibly complex and argued objecting parties really just want to be in on the financing. He highlighted that the DIP financing sends the right signal to the vendors, like Mattel. Marshall Huebner of Davis Polk on behalf of JPMorgan then argued that the JPMorgan-led facility is not impacted by any of the issues raised by the Taj noteholders and B2/B3 lenders. No one is clamoring to get into the $2.3 billion facility that five banks have stepped up to provide on a week’s notice, Huebner argued and he added that JPMorgan is sensitive to the notice point made by landlords that noted the short time frame between the filing and first day hearing. However, Huebner also said that he has seen some of the same lawyers that presented objections today make similar arguments in other cases, that leases prohibit the requested financing, but he said it was revealed in many of those cases’ final hearing that such lawyers’ arguments were “dead wrong.” He added that his client is lending $2.3 billion, with a lot of it probably going out “in a day or two.” The current language is what Huebner’s client has agreed to and such language has been approved in multiple cases including in multiple retail cases, he emphasized. He emphasized that JPMorgan has proposed language that makes clear that the DIP lenders will only have rights as permitted under applicable law and has agreed not to file any mortgages until after the final order is entered. JPMorgan will not, however, retract from the boundaries of what its legal rights might be, he said. Joshua Feltman of Wachtell for the DIP term loan lenders also spoke briefly in support of the Delaware DIP facility, saying he has authorization from holders of more than 50% of the aggregate B2/B3 and B4 lenders for the DIP financing.

Ultimately, Judge Phillips approved the DIP financing facilities. He quickly approved the remaining first day motions shortly thereafter following a presentation of those motions by Emily Geier of Kirkland & Ellis for the debtors.

The second day hearing is scheduled for Oct 10.