15 September 2017 by lberuti
A number of TOY’s (Toys R Us) suppliers are said to have cut back their shipments to the retailer. TOY has allegedly open talks with lenders over a new loan that would allow the company to stay open while it works out a recovery plan through bankruptcy proceedings. It has thus become extremely expensive for vendors to insure their shipments, as they often rank among the creditors with the lowest priority for getting repaid if a company seeks court protection. Their decision on whether to continue shipping goods will play a decisive part in determining TOY’s fate. Investors rushed to snap up protection on the back of these rumours. They pushed the cost of the 5-year protection up 13pts to 61pts upfront (it costs $61 upfront to insure $100 of debt plus another $5 annually). They also flattened dramatically the risk premium curve, making it almost as expensive to insure debt over 1 year than it is to insure it over 5. The market only sees 1 chance out of 3 that TOY will survive over the next 12 months.