Toys ‘R’ Us in Need of Rescue

Toys-r-Us Insolvency Company Debt

3,200 Jobs could be Lost if Toys ‘R’ Us Rescue Bid Fails

Toys ‘R’ Us UK could be facing collapse this week unless the retailer can find £9m to pump into its pension scheme. The firm has already proposed a Company Voluntary Arrangement (CVA) to its creditors to try and keep it afloat, with 75 percent of the firm’s backers required to accept the proposals. However, as part of the CVA, Toys ‘R’ Us will still close 26 of its branches, which in itself will lead to the loss of some 800 jobs.

The Rescue Attempt

One of the major barriers to the approval of the CVA is the Pension Protection Fund’s (PPF) current refusal to back the restructuring plans. The insolvency procedure automatically leads to the assessment of the pension fund by the PPF, which also has a key vote at the CVA meeting.

The Pension Protection Fund (PPF) – which was established to pay compensation to members of eligible defined pension schemes where there are insufficient assets to do so – is demanding the ailing toy retailer pumps £9m into its UK pension fund.  

If the CVA does not get the PPF’s go-ahead then the store is likely to fall into administration with the closure of all 84 of the permanent stores and 20 more pop-up stores in the UK. That will leave all 3,200 UK staff facing redundancy.

Why is the PPF Refusing to Back the CVA?

Toys ‘R’ Us is currently in a very precarious position, and with the vote on the CVA due to be held tomorrow (21 December), it is quickly running out of negotiation time. The PPF is concerned that the Toys ‘R’ Us pension scheme is already underfunded, with the latest accounts filed at Companies House showing a pension deficit of £18.4m. To vote in favour of the CVA, they would want to see a £9m injection to ensure the position of the scheme does not weaken further.

If Toys ‘R’ Us is unable or does not agree to pay the £9m then the PPF could choose to block the CVA, throwing the store’s restructuring plans into chaos. Alternatively, it could withdraw its support of the chain entirely, potentially causing even more serious damage.

Could Help Come From Elsewhere?

The parent firm of Toys ‘R’ Us is based in the US, so you might think help could come from over the pond. However, that filed for bankruptcy in September and due to tight business regulations, it is not able to bail the UK stores out.

In fact, money has recently travelled in the opposite way, with the UK division of Toys ‘R’ Us writing off a £584m loan to the US parent store. The US parent entered a court-led bankruptcy protection after running up £3.7bn of debts. This is another factor the PPF will take into account when deciding how to vote, with the position of the US parent making it understandably wary.     

The Cause of the Decline

The decline of Toys ‘R’ Us has been a protracted one. In the US and Canada, the parent company filed for bankruptcy after being crippled by $5bn of debt which left it with annual interest payments of $500m a year. This level of debt left the firm unable to invest in its online operation and dated stores, which struggle to attract family shoppers. Steve Knights, the managing director of Toys ‘R’ Us UK, has said the retailer’s larger shops are simply too big and expensive to run in the current economic climate.

However, despite making a loss in seven of the last eight years, research has shown that payments to its UK boss have soared from £356,000 in 2014 to £1m in 2015 and another £1.3m for the year ending 30 January 2016. Given that unjustifiable remuneration and the neglect of the pension fund, it’s not hard to see why the PPF is hesitant.

Workers will still be Protected   

The position as it’s currently understood is that Toys ‘R’ Us wants to meet the PPF’s demand but doesn’t have the resources to do so. Whatever that means for the outcome of the CVA vote, workers can rest assured that they will remain protected and their pensions will be paid.

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