Toys R Us is at risk of breaching a covenant on one of its loans, intensifying concerns about its ability to emerge from bankruptcy protection, sources have told the media.
The storied toy retailer secured a $3.1-billion loan from a group of lenders led by J.P. Morgan Chase (NYSE: JPM) prior to filing for bankruptcy protection.
That loan, a so-called debtor-in-possession, or "DIP," loan is given to a company to provide the money it needs to invest in the business while it is in bankruptcy.
But after a dismal holiday season, Toys R Us is now at risk of having too little cash to satisfy the terms of the loan.
The retailer is currently in compliance with its loan terms, and has a number of options afforded to it before it does breach the covenant, the sources said. These options include getting financing elsewhere so its cash balance does not breach the loan terms, or renegotiating the debt terms with its lenders.
If Toys R Us does breach the covenant, its DIP lenders have the option to force it to immediately pay them back, which could in turn force the retailer into liquidation.
The sources stressed that no decisions have been made and the DIP lenders remain supportive of Toys R Us.
As part of its negotiations with debt holders, Toys R Us is weighing more store closures, some of the sources said, cautioning that no decisions have been made to shutter additional stores yet. The Wall Street Journal reported on Wednesday that the retailer plans to close another 200 stores.
