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Bain Capital, KKR to back hardship fund for Toys R Us workers

When Toys R Us closed its US operations at the end of June, the famed toy retailer laid off some 33,000 workers.

Three months later, storefronts across the country where the company used to reside remain empty. And laid-off employees are still waiting for the roughly $75 million in combined severance pay they were once promised by management.

But that could soon change. Bain Capital and KKR have held discussions with workplace advocacy group Organization United for Respect and former Toys R Us employees about setting up a hardship fund to pay back that full $75 million severance figure, with an announcement “hopefully coming soon,” according to a source close to the situation. Late Friday, meanwhile, The Wall Street Journal reported that Bain Capital and KKR are working on a $20 million severance fund.

Bain Capital and KKR didn’t respond to requests for comment.

Setting up this type of mea culpa fund would be a highly unusual move for a private equity industry that typically aims to maximize profits at all costs. But KKR and Bain Capital both received significant blowback from both the public and LPs after Toys R Us suffered a swift demise following a disastrous holiday sales season.

How did we get here?

Bain Capital, KKR and Vornado Realty Trust took Toys R Us private for about $6.6 billion in 2005. The deal reportedly saddled the company with about $5 billion in debt, a total that became impossible to pay down in part because of the rise of online retailers such as Amazon and Walmart. Meanwhile, the lack of available capital made it difficult for the business to adjust to a retail industry that began producing more revenue from ecommerce.

Toys R Us eventually filed for bankruptcy in September 2015, with plans to either find a buyer or restructure the company’s debt load. But lenders including Angelo Gordon & Co. and Solus Alternative Asset Management, a pair of New York-based investors, ultimately decided to shut down the company’s US operations.

In August, both firms sent a letter through law firm Wachtell, Lipton, Rosen & Katz explaining that they “do not believe there is a sound basis to claim that Toys R Us secured lenders should make additional financial contributions for the benefit of employees or other unsecured creditors.” The letter cited the fact Angelo Gordon and Solus had already contributed to a $450 million bankruptcy loan, helped implement a compensation plan that paid out “millions of dollars” to employees and gave Toys R Us additional time to find a buyer after it defaulted on the loan, among other concessions.

Oaktree Capital Management, Highland Capital Management and Franklin Mutual Advisers were also among the secured lenders that opted for liquidation, but none have agreed to contribute to the hardship fund, according to a source. Vornado Realty Trust, meanwhile, has not responded to requests to make a financial contribution.

The outrage over the whole episode has poured over to Capitol Hill. In July, 19 Democratic members of Congress sent Toys R Us’ former owners an informal letter asking about their business practices. And this past week, a group of the store’s former workers in New Jersey lobbied the state’s investment council to pull its $300 million investment in Solus. In the meantime, former Toys R Us employees have lobbied LPs in Texas, Oregon, North Carolina, Virginia, Arizona and Minnesota with investments in the lenders to ask they pay back some of the severance.

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