What's going on?

The world�s largest toy retailer, Toys “R” Us, filed for bankruptcy late on Monday � but it�s not closing down anytime soon�

What does this mean?

Toys “R” Us was bought by a number of �private equity� firms in 2005 and, as part of the deal, took on a lot of debt. This is often the case when private equity firms buy a company as its cheaper to fund the purchase this way and it carries tax advantages. In recent years, Toys “R” Us� sales have fallen and it has started to lose money. Its struggles stem partly from its relatively late (and tepid) focus on ecommerce, which itself stemmed partly from the fact that Toys “R” Us didn�t have a lot of spare cash to invest in its ecommerce offering (due to its high debt).

Why should I care?

The bigger picture: Toys “R” Us isn�t going to disappear�

In the US, there are different types of �bankruptcies�. One is the more familiar type, where a company ceases to exist, but the one that Toys “R” Us is undergoing � often referred to as �Chapter 11� � is better thought of as a big change to its debts. While its lenders may not get repaid in full, Toys “R” Us is likely to survive, kind of as a new entity but with the same name. Interestingly, this sort of bankruptcy doesn�t (yet) exist in many other countries. Proponents of Chapter 11 say it allows companies to recover from hardship without causing as much harm to the overall economy as, say, shutting down the business completely would cause.

For markets: Major toymakers have been hit hard by Toys “R” Us� impending bankruptcy.

Shares of major toymakers, Mattel and Hasbro, have fallen by over 10% since reports first leaked a few weeks ago that Toys “R” Us would be filing for bankruptcy. Part of the problem is that Toys “R” Us owes its suppliers money, and those firms may not get all of it back. The bankruptcy is also a potential problem for the future: sales through Toys “R” Us account for a significant portion of both Mattel�s (11%) and Hasbro�s (9%) sales. However, Toys “R” Us could emerge from this bankruptcy in a stronger financial position.