Distil Share News (DIS)

By Tracy Rucinski , Richa Naidu and Melissa Fares

CHICAGO/NEW YORK, March 17 (Reuters) - When Toys 'R' Ussecured a $3.1 billion bankruptcy loan in September, toy makerswere reassured they would be paid for goods delivered to thecompany as it tried to emerge from Chapter 11.

Now those payments are at risk in a dramatic turn of eventsas the iconic toy retailer speeds toward U.S. liquidation.

More than a dozen executives, specialists and lawyersinterviewed by Reuters said they expected many small vendors togo bankrupt due to the disappearance of Toys 'R' Us and Babies'R' Us in the United States.

While the downfall of Toys 'R' Us came quickly in the UnitedStates, the Wayne, New Jersey-based retailer is still trying tofind a buyer for its businesses in Canada, Europe and Asia. Inthe meantime, it wants to keep stores stocked to maintaincustomers and value.

"We have a $14-$15 million payment due that hasn't beenpaid," Isaac Larian, chief executive of Bratz dolls maker MGAEntertainment, said. "If I was a guessing man, I wouldn't thinkI'd get all of it back."

MGA, whose L.O.L. Surprise! toys were the industry's topseller last year, stopped supplying goods to Toys 'R' Us onWednesday, Larian said. Toys 'R' Us accounted for 15 percent ofMGA's annual sales. Larian spent Thursday and Friday on thephone with his lawyers and tending to a bid he and other vendorshave made to acquire Toys 'R' Us' Canadian operations.

“I have been working from 4 a.m. till midnight every day onthis talking to other toy company executives, lawyers, bankers,other retailers," Larian said. "I’m exhausted.”

At a Thursday hearing at U.S. Bankruptcy Court in Richmond,Virginia, vendor lawyers said they were receiving hourly callsfrom clients about hundreds of millions of dollars of claims.Whether or not they receive payment will depend on the outcomeof the liquidation proceedings.

For some, the writing for Toys 'R' Us had been on the wall.Marc Wagman, who heads insurance broker Gallagher's U.S.trade credit and political risk business, said credit insurersstopped covering Toys 'R' Us in the first and second quarters of2017.

"Unfortunately, for a lot of these toy companies, Toys 'R'Us represented a means of testing consumer taste, a big retailopportunity and, for some, accounted for 20-40 percent ofrevenue. How that's going to be replaced remains to be seen,"Wagman said.

Toys 'R' Us, with $11 billion in annual revenue and shops upto 50,000 square feet (4,600 square meters) in size, was thelast major specialty toy retailer, a loss not only for small,innovative toy makers that relied on it as a showcase, but alsofor brands such as Walt Disney Co that rolled outproducts with partner labels for blockbuster films like "Frozen"and some of the "Star Wars" series.

'I'M LOSING A LOT OF BUSINESS'

“I have a short-term concern about the loss of business, theloss of one of my best partners over many, many decades," saidJoseph Shamie, president of Delta Children, one of the chain’sbiggest vendors of children’s furniture, with roughly 470employees.

He has been selling to Toys 'R' Us for more than 40 years,since he was 19. "I’m losing a lot of business and in veryquick, unmanaged amount of time."

Shamie said his company will continue to supply products toToys 'R' Us stores outside the United States, but that they are“watching closely.”

“I have to create opportunity so I can continue to employthe people I employ," he said.

In a dire landscape that claimed 17 retail bankruptcies andmore than 8,000 U.S. store closures last year alone, vendors arewising up on their customers' financial health, paying closeattention to online sales, new sources of revenue and,especially, liquidity.

Among those that could pick up toy market share: big-boxretailers Walmart Inc and Target Corp; chainssuch as JC Penney Co Inc, Kohls Corp and BedBath & Beyond; drugstores like CVS Health Corpand Rite Aid Corp; and discount outlets like DollarGeneral Corp or TJ Maxx.

“We’ll work really hard with folks like Walmart and Targetto see if they can take up volume by year-end,” said JayForeman, chief executive of Basic Fun!, which sells Cake PopCuties and Poopeez as well as classics like Lite-Brite.

Foreman expects a 10 percent revenue hit from the loss ofToys ‘R’ Us.

He is also working with Amazon.com Inc, which willbecome its second- or third-biggest account this year versusninth in 2015, but said Amazon does not give minimum orders.

“They’ll put it online and say 'we’ll see how it does.' "

Without mass distribution and a physical showcase, co-ChiefExecutive Nick Mowbray of toymaker Zuru Inc said innovationswould become far riskier, leaving a dent in toy selection forcustomers.

"Doing business with a company in Chapter 11 was notsupposed to be a 'gotcha' situation, but apparently in this caseit was," said Learning Resources Inc Chief Executive RickWoldenberg. His Vernon Hills, Illinois, company is owed morethan $1 million by Toys 'R' Us.

He said his company will no longer supply to Toys 'R' Us. "Idon't know how many times they think we can be punished."(Additional reporting by Tom Hals in Wilmington, Del.Writing by Tracy RucinskiEditing by Vanessa O'Connell Nick Zieminski)