Legal Row Erupts Over £263M Toys R Us Property Carcass

A High Court legal claim has been filed to try to halt the sale of a big chunk of the U.K. property portfolio of bankrupt retailer Toys R Us.

The complex case involves a claim filed against the company which was leading the workout of a £263M loan secured against a portfolio of former Toys R Us stores and a company trying to buy the portfolio. Twist: The two companies are owned by the same person.

The case will determine the ownership of a portfolio of assets once let to the company behind one of the highest-profile retail bankruptcies of recent years, at a crucial moment for the struggling retail property sector.

Among other things the legal claim is looking to block the sale of the portfolio, which amounts to about a quarter of Toys R Us’ U.K. estate, and was once valued at £360M, but could today be worth closer to £230M.

Six weeks ago CBRE was appointed as special servicer to a £263M CMBS loan secured against 24 stores and a distribution centre, occupied by Toys R Us before its administration in February this year. The properties are now vacant.

Giant U.S. fund manager PIMCO was the investor which bought the largest chunk of the bonds secured against the portfolio when the loan was securitised in 2013, filings from various PIMCO funds show.

A public notice relating to the securitisation said in August that a group of bondholders had decided to appoint CBRE to manage the loan as a replacement for Solutus, the previous special servicer.

On Monday, another notice said that CBRE had filed a High Court claim against, among others, Solutus, Solutus Director Neil Forkin and Bollinway Properties (which is attempting to buy the properties). Bollinway and Solutus are both owned by a company called Acepark, which is owned by Lancashire-based property investor Tim Knowles, Companies House records show.

Forkin was previously the receiver to the Toys R Us properties and the bankrupt company which owned them, meaning he had the legal power to decide their fate. CBRE’s public statement said it had moved to replace him on 24 August with two of their own directors.

But CBRE’s statement said that after this replacement was supposed to have taken place, on 21 September it received an email from Forkin saying that Bollinway Properties had exercised a purchase option it had agreed with Solutus which allowed it to buy the portfolio for the amount outstanding on the loan. That purchase option was agreed on 12 August, before Forkin’s replacement.

CBRE wants the court to block the sale of the portfolio, confirm that the purchase option was not valid and that Forkin is no longer in control of the portfolio or the bankrupt company that owns it.

Six of the original 31 properties in the portfolio were sold in June for £31M, which would mean there is £232M outstanding on the loan, and this is the minimum amount Bollinway would have to pay.

That is more than the £194M estimate of the vacant possession value of the portfolio when the loan was issued in 2013, but much less than the £314M open market valuation in 2013. At its peak in 2016 the portfolio was valued at £360M.

The six assets sold in June were disposed of at an average premium of 18% to their vacant possession valuation, according to an estimate by Bisnow using public documents. A similar rate would mean the remaining 25 assets are valued at about £200M. 

The events leading up to the legal claim are as complicated as the claim itself. Solutus was appointed special servicer to the CMBS loan in February, and five days later Toys R Us went into administration.

In March Forkin was appointed receiver to the property portfolio and the special purpose vehicle which owned it, which was previously controlled by Toys R Us’ former owners, KKR, Bain Capital and Vornado.

Advisors Cushman & Wakefield and Morgan Williams were appointed at the same time to come up with a business plan to maximise the value of the portfolio by reletting stores and selling off the assets.

In April, Forkin and Solutus sold the shares in the company that owned the portfolio to Acepark, which owns Solutus.

Solutus flagged the sale and the cross-ownership in a public statement to bondholders in June. The sale of the shares “creates an alignment of interest between creditors and Acepark who is now investing significant resources into the management of the portfolio and execution of the business plan” Solutus said.

According to Acepark’s most recent set of accounts it has taken on £360M of liabilities by buying the shares in the company that owns the portfolio, but it thinks the sale of the properties will allow the £263M loan to be repaid in full and leave it with a profit.

If CBRE’s legal claim is successful, and its directors are appointed as the receivers in place of Forkin, Acepark and Solutus, a new strategy for the assets would need to be devised.

Reletting the stores will not be easy, whoever owns them. The 24 stores are all out-of-town retail park units, with an average size of 40K SF. There are few tenants looking to take such large units in the current market, so whoever is in charge of the portfolio will need to look at options including chopping up stores into smaller units.

They could be leased to leisure or even last-mile logistics occupiers, but since such firms typically pay lower rents than retailers, the value of the assets would fall.

Solutus and CBRE declined to comment.