Dive Brief:

• Unsecured creditors to Toys R Us are seeking information in court about the retailer's financial relationship with its private equity owners in the years leading up to the company's Chapter 11 bankruptcy this fall, according to court filings. The documents could lay the groundwork for a lawsuit centered on transactions between Toys R Us and its owners. Such suits are one of the few bargaining tools that unsecured creditors have in bankruptcy proceedings, experts have told Retail Dive.
• In court documents filed this week, the lender group said that Toys R Us has paid its private equity sponsors — Kohlberg Kravis Roberts, Bain Capital Partners and Vornado Realty Trust — more than $100 million in advisory services, transaction fees and lease payments in the five years leading up to the retailer's bankruptcy. That includes more than $15 million a year in quarterly fees that Toys R Us paid to its owners under an advisory agreement.
• Also this week, the court overseeing Toys R Us' bankruptcy approved a multimillion dollar incentive pay plan for the bankrupt retailer's executives, provided the company hits a profit target of $550 million. An earlier plan faced objections from the U.S. trustee in the Toys R Us case. The trustee noted that the original plan, which called for a maximum of $32 million in bonuses for the top 17 executives, was a "princely" payout and followed the more than $8 million paid to executives immediately before Toys R Us filed for bankruptcy.

Dive Insight:

The effort to examine Toys R Us' payments to private equity sponsors is common in bankruptcy suits, and is often resolved before a lawsuit goes to trial. With that said, the move by some Toys R Us lenders to pull back the veil on the relationship between the retailer and its owners carries the potential to complicate the story of Toys R Us' bankruptcy.

Any money Toys R Us paid back to its owners for advisory services was on top of the $400 million Toys R Us made in interest payments on its $5 billion-plus debt load, a hangover from its leveraged buyout a decade ago. And it's all money unavailable to Toys R Us to modernize or invest in its prices as it tried to protect its market share from major rivals — namely Walmart, Target and Amazon.

Many in the retail world are already skeptical of such fees that retailers pay their private equity buyers. Eileen Applebaum, senior economist at the Center for Economic Research, described in a previous interview some instances of these payments as "hidden dividends" that companies pay private equity sponsors.

Unlike some other retailers filing for Chapter 11 this year, Toys R Us had no deal worked out with its lenders to reduce its debt load, leaving a degree of uncertainty over how the process will play out and what Toys R Us will look like on the other side. Nor has it said how many stores it will close. We have learned recently, though, that the company plans to close about 25% of its stores in the United Kingdom. With that announcement, the retailer said its larger warehouse stores in that region had become largely unprofitable, while its smaller and newer stores were performing better.

This week attorneys for the retailer acknowledged in court that the company needed more time to negotiate and release a reorganization plan in bankruptcy, a likely symptom of not having a plan worked out ahead of time, as others — including Gymboree, rue21 and Payless — did before filing.

That plan could partly hinge on how Toys R Us performs during the holiday season, which has already seen fiercely competitive discounting on toys.