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Analysis: Small Group of Hedge Funds Influenced Toys “R” Us’s Decision to Liquidate

ABI Bankruptcy Brief

August 23, 2018

 
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NEWS AND ANALYSIS

Analysis: Small Group of Hedge Funds Influenced Toys “R” Us’s Decision to Liquidate

Many factors contributed to the financial troubles of Toys “R” Us, including the costs of a leveraged buyout, competition from Amazon.com Inc. and a disastrous Christmas season. What pushed it over the edge, however, was a small group of hedge funds, according to a Wall Street Journal analysis published today. Solus Alternative Asset Management, a New York hedge fund, pressed four other Toys “R” Us debtholders to conclude that the company was worth more dead than alive, according to two Toys “R” Us directors. That was enough to halt the company’s frantic restructuring effort. Toys “R” Us “had real people, credible institutions, engaged in a serious discussion around potentially reorganizing the company,” said David Kurtz, head of restructuring at Lazard and an adviser to the company, at a March court hearing. There was a deep-pocketed investor talking to the company about backing the effort, he said. Yet before the company could finish pulling together a reorganization plan, the five debtholders ran out of patience. They held a critical piece of secured debt with a face value of $668 million — a minority of the $5.3 billion of debt the company listed when it sought chapter 11 protection, bankruptcy court records show. Under the company’s complex capital structure, they had the power to essentially stop the clock on the reorganization effort. Toys “R” Us concluded it had no choice but to liquidate.
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Commentary: Planned Debt Restructuring Agreement Benefits Bankers, Could Block Puerto Rico from Holding Them Legally Accountable*

An agreement nearing approval as part of Puerto Rico’s debt-restructuring process could block many forms of legal accountability for a key set of government officials and bankers that oversaw the creation of the debt — and leave credit unions and municipalities with the tab, according to a recent commentary in the labor-backed site HedgeClippers.org. The restructuring agreement for $4 billion in Government Development Bank (GDB) debt was negotiated quietly and behind closed doors, as part of PROMESA’s out-of-court Title VI process, by conflicted players; revolving-door figures who were previously officials at the GDB have played some oversight role with respect to the debt, and/or have close ties to financial institutions that have profited from debt issuances over the years, according to the commentary. The agreement is now in the voting stage and will need to secure votes in favor from two-thirds of GDB creditors. Once the agreement is final, little-noticed provisions in the agreement itself and in the GDB Restructuring Act of 2017 will take effect that will block significant forms of legal action against these officials and related institutions, according to the commentary.
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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Senate Panel Approves Trump’s Pick to Run CFPB

President Trump’s pick to lead the Consumer Financial Protection Bureau cleared a key hurdle today with a party-line vote (13-12) by the Senate Banking Committee, the Wall Street Journal reported. The committee's vote sent Kathy Kraninger’s nomination to the full Senate, which is likely to hold a final vote in the coming weeks. If confirmed, Kraninger, a senior official at the Office of Management and Budget, would replace Mick Mulvaney, who has implemented sweeping changes at the CFPB since taking it over last November. Kraninger is a close associate of Mulvaney, who also heads the OMB. Kraninger has been criticized by Democrats for her lack of experience on consumer-finance issues. Democrats have attempted to tie her to the Trump administration’s immigration policies, citing her work as a senior White House budget official on agencies involved in immigration. At her confirmation hearing at the Senate panel in July, Kraninger pledged to pursue the “proper balancing of all interests,” including consumers and financial companies, signaling she would continue a shift in the bureau’s operations from the consumer-focused policies of the Obama era.
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Commentary: Student Loan Debt Biting into the Economy*

Millions of millennials have already put off settling down because of the rising costs of servicing college debts to the detriment of economic growth, according to a Bloomberg News commentary. A recent report by Bloom Economic Research breaks out the demographic challenges that have resulted from the 176 percent increase in student loan debt in the decade through 2017. In the years leading up to the housing crisis and the dramatic loosening of mortgage credit standards, many families tapped readily available home equity to finance pricier higher educations for their children than they would have otherwise been able to afford. After the bust, this avenue was blocked, leaving only the higher education inflation it had fueled. From 2007 through 2017, the CPI rose by 21 percent. Over that same period, college tuition costs jumped 63 percent, school housing surged 51 percent and the price of textbooks soared 88 percent. As of the fourth quarter, student loans represented 10.5 percent of a record $13.1 trillion in U.S. household debt, up from 3.3 percent at the start of 2003. “You do stand to see longer-term negative effects on people who can’t pay off their student loans. It hurts their credit rating, it impacts the entire half of their economic life,” Powell said in March. “As this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth.”
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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Notice to All ABI Members

UNITE HERE Local 11 is a labor union based in southern California. They represent more than 20,000 workers in the hotel and restaurant industry. The union has been attempting to organize employees at the Terranea Resort, site of ABI’s 2019 Winter Leadership Conference (WLC). UNITE HERE Local 11 is known for their aggressive tactics, both on site and also aimed at hotel clients. The union has repeatedly contacted ABI leadership, including members of the board and committee leaders, to urge ABI to cancel or move the WLC. ABI has no plans to move or cancel the event, which would result in substantial legal exposure. If you are contacted by phone or email by representatives of the union, ABI encourages you to ignore rather than engage or respond. ABI regrets this development and will continue to closely follow events at the property.

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