In the Age of Amazon, Toys ‘R’ Us and Other Bankruptcies Test Private Equity’s Playbook

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Money, too, was tight. Most of its debt, totaling about $5 billion, had not been paid down since the buyout 12 years earlier. It was paying $400 million in interest payments each year.

“This company had a long history of taking on debt and kicking the can down the road for 10 years, and refinancing,” said Douglas M. Foley, a lawyer at McGuireWoods, who is representing a lender in the Toys “R” Us bankruptcy.

With sales falling and debt payments mounting, the company’s lawyer said in September that Toys “R” Us had “too much debt.” It filed for Chapter 11 bankruptcy protection, seeking to shed some of its debt and reorganize its business.

The company secured new loans to keep operating into the critical holiday selling season and said it would hire hundreds of seasonal workers to help improve customer service. But the holidays were a bust for Toys “R” Us, even as other retailers reported strong sales. On Thursday, the company said that its earnings during the important shopping season were $250 million less than expected.

The lenders, which had given the company considerable leeway during the holidays, lost confidence in company’s turnaround plan. “The business plan was underwhelming, that is best way to say it,’’ said Mr. Foley.

The company has been hemorrhaging money. Mr. Foley calculated that company has spent nearly $50 million on legal, banking and consulting fees from September through January. The lenders determined that they needed to stop burning through cash and start selling off the company’s inventory and real estate.

The company said on Thursday that it talked to several possible buyers of its American operations. But it could not complete a sale, leading to the demise of the 70-year-old retailer.

“The retail industry is going through such a conclusion, it is not clear what the end of the road looks like,” said Stephen B. Selbst, a bankruptcy lawyer at Herrick Feinstein. “If you are an equity investor, you probably think ‘you know what? I have other uses for my money.”

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