Toys R Us To Liquidate U.S. Operations After Execs Received Bonuses

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Despite being in bankruptcy, a U.S. judge allowed executives at Toys U Us to receive holiday bonuses.

Bloomberg Markets is reporting that Toys R Us, which filed for bankruptcy last year, is making preparations to liquidate operations after struggling to locate a buyer or reach a deal with lenders to restructure its debt.

While the situation is still fluid, a shutdown of the U.S. division has become increasingly likely in recent days, said the people, who asked not to be identified because the information is private. Hopes are fading that a buyer will emerge to keep some of the business operating, or that lenders will agree on terms of a debt restructuring, [people familiar with the matter] said.

The downfall of Toys “R” Us can be traced back to a $7.5 billion leveraged buyout in 2005, when Bain Capital, KKR & Co. and Vornado Realty Trust loaded the company with debt. For years, the retailer was able to refinance its debt and delay a reckoning. But the emergence of online competitors, like Inc., weighed on results. The company’s massive interest payments also sucked up resources that could have gone toward technology and improving operations.

In spite of the company's path toward bankruptcy -- and now likely liquidation -- millions of dollars in bonuses were approved last December for Toys R Us senior management:

Toys "R" Us has won approval to pay $16 million in bonuses to 17 top executives if the company hits financial targets during the holiday shopping season.

Judy Robbins, a Justice department attorney representing the interest of creditors, argued at the time that the bonuses were intended to keep executives from exiting the flailing company, which is not permissible.

"It defies logic and wisdom, not to mention the Bankruptcy Code, that a bankrupt company would now propose further multi-million dollar bonuses for the senior leadership of a company that began the year with employee layoffs and concludes it in the midst of the holiday season in bankruptcy," she argued in her filing. "Apparently, this Christmas, Toys "R" Us intends to deliver not only 'children their biggest smiles of the year' but the insiders, too."

Lower-level employees have been treated far less graciously, however. Along with news of a further 180 stores closing this year came the discovery that promised severance packages for laid-off employees were no longer on the table.

The company has also walked back from a promise to offer severance to all affected employees. According to internal documents reviewed by The Wall Street Journal, managers were recently instructed to tell hourly workers that “there are no severance benefits being provided for the store-closing process.”