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(Bloomberg) — Insurance companies are cutting back on their coverage of Toys “R” Us Inc. suppliers, bringing another headache to a retailer that has suffered more than two years of losses, people familiar with the matter said.
Coface SA and Euler Hermes Group, which sell credit insurance to vendors, are removing Toys “R” Us from some policies and declining to renew coverage in other cases, said the people, who asked not to be identified because the process isn’t public. The carriers may still negotiate with some vendors to keep providing some protection, one of the people said.
Losing coverage could raise concerns for toy suppliers as they weigh the risks of shipping to the retail chain, which scrapped plans for an initial public offering in 2013. Credit insurance protects suppliers in case a retailer fails to pay them for merchandise, as in the event of a bankruptcy.

Toys “R” Us also has been seeking additional restructuring advisers, who would look for ways to cut costs and explore the company’s next steps, said one of the people. The moves signal mounting troubles at the toy-store chain, which was taken private by Bain Capital Partners, KKR & Co. and Vornado Realty Trust in a $6.6 billion deal in 2005. Though it’s working on a comeback, Toys “R” Us has struggled to compete against online sellers and mass merchants like Wal-Mart Stores Inc.
The retailer has already been working with consultants at AlixPartners to cut expenses. It said last year that the firm helped it identify $150 million to $200 million in cost savings that could be achieved by the end of 2016. Toys “R” Us has since updated that target to $325 million.

Investor Meeting

The company announced on Monday that it will hold an investor meeting on July 30 to discuss its progress. As part of the event, Toys “R” Us said it would address the insurance concerns raised by Bloomberg News, as well as “the erroneous statement” that it is seeking to hire a restructuring adviser. Toys “R” Us, based in Wayne, New Jersey, declined to comment on the matter earlier in the day.

Coface spokeswoman Maria Krellenstein said her firm “maintains regular contacts with the Toys ‘R’ Us group in order to follow closely its development.” She declined to comment on specific actions. Euler said it doesn’t comment on individual policyholders or coverage.

“Coface continues to accomplish its mission of prevention of the risk relating to each customer of the insured companies,” Krellenstein said.

New CEO

David Brandon took over as the company’s chief executive officer earlier this month. The 63-year-old replaced Antonio Urcelay, who was in the job less than two years. For 11 years, Brandon ran Domino’s Pizza Inc. — another Bain-backed company – – and oversaw its IPO. He then became athletic director at the University of Michigan in 2010.

The credit insurers are pulling back at the same time sentiment sours among investors in the retailer’s $5 billion of debt.
The upfront cost to protect against a default by Toys “R” Us climbed to as high as 43.5 percent today, the highest level since October and up from 30 percent at the end of June, according to credit-derivatives data provider CMA. That means it would cost investors $4.35 million initially, in addition to $500,000 annually, to protect $10 million of the retailer’s obligations from default for five years.

Bonds Decline

The company’s $450 million 10.375 percent of senior unsecured bonds maturing August 2017 fell 6.125 cents to 76.5 cents on the dollar at 4:38 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Credit insurers sometimes cancel existing policies if a company’s performance declines precipitously enough to place its ability to keep operating in doubt. That occurred in the months before bankruptcy filings at RadioShack Corp., Borders Group Inc. and Circuit City Stores Inc., one person said.

Retailers can recover from the setback, though. That was the case with J.C. Penney Co., which saw its vendor insurance restored after conditions improved. Sears Holdings Corp. suppliers also had coverage cut or reduced last year by at least three insurance firms, people familiar with the matter said at the time.

–With assistance from Matt Townsend and Katherine Chiglinsky in New York.

To contact the reporters on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net; Jodi Xu Klein in New York at jxu205@bloomberg.net To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net; Shannon D. Harrington at sharrington6@bloomberg.net