Relevant Document:Agenda
A hearing today in the Toys “R” Us cases included extensive discussion of various long-simmering inter-estate disputes between the various debtor silos in the case, summarized today as relating to three issues: intellectual property rights, the debtors’ private-label business and the debtors’ shared services business. The comments were prompted by the debtors’ recently filed
motion for approval of bid procedures for the shared services business and
objections to that motion filed by the Taj debtors’ Asia JV and the ad hoc Taj noteholder group. At the suggestion of the debtors and as agreed by the parties, the court pushed off the matter for a week to allow discussion between the parties.
Also at the hearing, Judge Keith Phillips granted the Propco I debtors’
sale motion (certain objector-specific aspects of the sale were adjourned), granted the Propco I debtors’ bar date motion and rejected a
motion by a claimant seeking to file a late claim.
At the outset of the hearing, Joshua Sussberg of Kirkland & Ellis, counsel to the debtors, discussed the shared services business bid procedures and announced the debtors’ intention to delay consideration of the merits of the motion for a week so that the parties could discuss possible resolutions to the objections, in particular a potentially revised auction timeline. If no agreement can be reached, the debtors will return to court on Oct. 17 to hear the matter. The debtors have selected the ad hoc group of B-4 term lenders as stalking horse bidder for the shared services business with a $57.5 million credit bid. According to the bidding procedures motion, the group has agreed to cap its bid at that amount and not otherwise participate in the auction if there is another qualifying bid.
The shared services center was established as part of the debtors’ wind-down process. Transition services agreements have been entered into with Toys’ entities in Canada, Central Europe, Iberia and France through April 2019. As part of the sale motion and in an attempt to resolve the Asia JV’s plan objection, the Delaware disinterested directors - Alan Carr and Neal Goldman - agreed to provide certain “ITASSA services” to the Asia JV until the earliest of “(i) the effective date of the chapter 11 plan for the Taj Debtors or any other plan of reorganization for Inc., (ii) the legal separation of the Asia JV from Inc., or, (iii) April 30, 2019,” according to the motion.
Sussberg separately announced today that the French court had approved Cyrus as the buyer of the Toys “R” Us French business.
The parties have agreed to the one-week extension to try to resolve aspects of the sale motion. However, several sides took the opportunity to state their positions on the various inter-estate issues percolating in the case.
For the
debtors, Sussberg reviewed that the three primary inter-estate issues are intellectual property rights, the debtors’ private-label business and the shared services. According to Sussberg, the term loan B lenders’ recovery under the plan is in “two buckets” - distributable assets (i.e. asset sale proceeds) and distributable equity (the Toys Delaware debtors’ interest in the various inter-estate issues). To resolve one of those issues, the Toys Delaware disinterested directors and the ad hoc group of B-4 lenders have agreed to the sale of the shared services under the capped credit bid, in order to provide other parties with the opportunity to bid on the shared services. Sussberg stressed that the business is collateral of the term loan B lenders who would be receiving the shared services under the prior iteration of the plan. Sussberg added that as for the objecting parties, he hopes a resolution can be reached on timing but that the issue of the Asia JV’s asserted ownership of “source code” may need to be resolved by the court.
Brian Hermann of Paul Weiss spoke next, for the
ad hoc group of Taj noteholders, saying that things sound “almost too good to be true” but that a couple of things went “unstated” by Sussberg. Hermann asserted that a “full picture” of the inter-estate issues would show the B-4 lenders “tying them all together,” because unlike at other foreign debtors, the B-4s will not allow a transition services agreement for Taj and instead are holding the services “over the JV’s head” as leverage, analogizing the situation as a “gun to the head” of the JV. That said, Hermann argued that if the shared services are going to be sold, there should be a “real process” - at least six weeks - that would allow the Taj noteholders to make a serious bid for the asset. Hermann stressed that the business is “not a melting ice cube at all” and said an “actual process” that is “intended to maximize value” would recognize this fact.
This prompted comments from Emil Kleinhaus of Wachtell Lipton for the
ad hoc group of B-4 lenders, who said first that he hopes the issues on the auction process could be resolved in the coming week. According to Kleinhaus, the inter-estate issues have been present in the case for a long time, and from the B-4’s perspective, they have been asked repeatedly to subsidize or support the Taj side. This manifested itself early in the case with the request to assume the subsidy agreement in the name of preserving value at Taj that was supposed to be so substantial that it would pass up to Toys Delaware. As for the ITASAA under which shared services are provided, Kleinhous said its current pricing at cost plus 8% was negotiated in the context of a single global business where Toys Delaware was providing services to valuable assets. Even so, he emphasized, it is in “no one's” interest to cut it off. The intent of the shared services bidding procedures is to allow parties to “take control of their own destiny,” he said.
Adam Rogoff of Kramer Levin spoke next, on behalf of the
unsecured creditors committee, saying that the UCC would like to see a global resolution of these issues but also supports taking a week to try to negotiate a resolution of issues concerning the timing of the auction. He added that the UCC is reviewing the papers but said its initial view is that if there is to be an auction, it should be done on a “reasonable” timeline.
Counsel to the
Toys Delaware disinterested directors Alan Carr and Neal Goldman
spoke next, stressing that the currently contemplated auction process is appropriate and fair in the judgment of the directors and that the “universe of known bidders” is small - the Asia JV, Taj or another recipient of shared services. The directors would support an agreed-upon extension of the auction process but wanted to be clear that this is not designed as a “leverage play.”
James Tecce of Quinn Emanuel spoke next for
the Taj debtors’ Asia JV with Fung Retailing. He noted a need to resolve any “ownership disputes” quickly and said there is a $10 million outstanding true-up payment dispute under the ITASAA that needs to be resolved.
Judge Phillips remarked that the parties appear to have a lot of work to do on reaching a resolution and set a hearing on the shared services bidding procedures for Oct. 17. The judge wished the parties luck in resolving the matters to avoid that hearing. He also set an objection deadline on the matter, at the request of Hermann for the Taj noteholders.