Retail chain Toys “R” Us recently began liquidation, closing 800 stores and laying off 33,000 employees.[i]
Toys “R” Us collapsed under more than $5 billion in debt piled on by private equity firms KKR and Bain Capital and real estate firm Vornado following their 2005 leveraged buyout of the retailer. When Toys “R” Us filed for bankruptcy in September 2017, it disclosed it had about $5 billion in debt and was spending about $400 million a year just to service that debt.[ii]
While 33,000 employees are out of work and limited partners in KKR and Bain Capital’s funds were wiped out, KKR, Bain Capital and Vornado appear to have profited from $464 million in fees and interest they collected from Toys “R” Us during the period they owned the company.[iii]
Toys “R” Us employees in late April asked KKR, Bain Capital and Vornado to pay severance to laid off employees out of the fees and interest they collected from Toys “R” Us. More than a month later KKR, Bain Capital and Vornado have not responded to employees’ request.
Rewarded for piling on debt
|Fees and Interest KKR, Bain, Vornado collected from Toys “R” Us ($ millions)[iv]|
|Fiscal Year||Advisory fee||Expenses||Transaction fee||Interest on debt||Total|
|Struck through transaction fees were accrued but later waived|
In July 2005 private equity firms KKR and Bain Capital and real estate firm Vornado acquired retail chain Toys “R” Us, putting in $1.6 billion in equity and drawing on more than $5 billion in debt.[v]
Like most leveraged buyouts, the fact that the debt was only recourse to Toy “R” Us meant the private equity buyers could pile on debt, expecting that they would not ultimately be responsible for paying it off.
The fee structure that Bain Capital, KKR, and Vornado put in place further incentivized them to use debt at Toys “R” Us. In July 2005, coincident with the buyout of Toys “R” Us, Bain Capital, KKR, and Vornado entered into an “Advisory Agreement” with the retailer spelling out fees the private equity firms would collect from Toys “R” Us.[vi]
The fees included:
“Advisory” fees: Bain Capital, KKR, and Vornado were to collect $15 million annually, increasing by 5% each year for “advisory” services to Toys “R” Us. The private equity firms collected the fee even if they did not actually provide any advisory services: “no minimum number of hours is required to be devoted by any or all of the Advisors on a weekly, monthly, annual, or other basis. The fees and other compensation specified in this Agreement will be payable by the Company regardless of the extent of services requested by the Company pursuant to this Agreement, and regardless of whether or not the Company requests an Advisor to provide any such services” (emphasis added).[vii]
Transaction fees: “The Company will pay the Advisors or their designees a transaction fee connection with the consummation of each transaction that is completed during the Term resulting in a Change in Control, acquisition, disposition or divestiture, spinoff, splitoff, or financing (whether debt or equity financing) by or involving Holdings, the Company or their respective subsidiaries in an amount equal to 1% of the aggregate value of each such transaction.”
In other words, every time Toys “R” Us issued or refinanced its debt Bain Capital, KKR, and Vornado got a fee, including when they were part of the group of lenders that provided the debt. In total, KKR, Bain Capital and Vornado collected $128 million in Transaction Fees in relation to Toys “R” Us debt. In addition the firms collected $185 million in “Advisory Fees,” nearly $8 million in expenses, and $143 million in interest from Toys “R” Us.
Transaction fees Toys “R” Us accrued or paid to KKR, Bain Capital, and Vornado:
2005 – Paid $81 million in relation to debt for the initial leveraged buyout.[viii]
2009 – Paid $7 million in transaction fees in relation to Propco II Financing. On November 20, 2009, TRU Propco II issued $725 million of senior secured 8.50% notes due 2017.[ix]
2010 – Paid $29 million in transaction fees in relation to the amendment and restatement of Toy “R” Us’ secured revolving credit facility, the offering of the Toys-Delaware Secured Notes and the amendment and restatement of Toy “R” Us’ Secured Term Loan.[x]
2011 – Paid $4 million in transaction fees in relation to the Incremental Secured Term Loan.[xi]
2012 – Paid $7 million in transaction fees in relation to the Spain Propco Facility Agreement, the offering of the 2017 Notes on August 1, 2012, and the Second Joinder Agreement entered into on April 10, 2012.[xii]
2013 – Accrued transaction fees of $15 million in relation to the Propco I Term Loan Facility entered into on August 21, 2013, New UK Propco Facility Agreement entered into on March 25, 2013, and France Propco Facility Agreement entered into on February 27, 2013.[xiii] These fees were later waived.[xiv]
2014 – Accrued transaction fees of $32 million in relation to the amendment and restatement of the ABL Facility on March 21, 2014 and the Secured Term B-4 Loan and Tranche A-1 Loan on October 24, 2014.[xv] These fees were later waived.[xvi]
[iii] Toys “R” Us SEC Forms 10-K, 10-Q, 2006-2017. “Toys “R” Us not a total loss for private equity fund managers,” Axios, Oct 5, 2017.
[iv] Toys “R” Us SEC Forms 10-K, 10-Q, 2006-2017.