Report: Hedge funds that ‘killed’ Toys ‘R’ Us ‘prey’ on Puerto Rico
SAN JUAN – Some of the hedge funds that are speculating on Puerto Rico debt also forced Toys R Us to shut down, according to a report released by Hedge Clippers, which advocates for income equality by targeting hedge and private equity funds, in partnership with the Center for Popular Democracy, a nonprofit that advocates for workers rights.
“The hedge funds, Solus Alternative Asset Management and Angelo Gordon, use extremely short-sighted strategies in order to score payouts for themselves and their investors. And whether they are forcing Toys R Us to shut down or extracting profit from a Puerto Rico in crisis, the people paying for their profits are the people who need that money most,” the report reads.
A number of former Toys ‘R’ Us workers from Puerto Rico marched in protest Tuesday along with members of the Hedge Clippers, Center for Popular Democracy, Organization United for Respect and Rise Up Retail to the New York offices of these two hedge funds.
“This week we find out that Angelo Gordon and Solus, the same hedge funds that pushed austerity measures and privatization on hurricane devastated Puerto Rico are the same ones that forced more than 30,000 to the streets as a result of the Toys R Us bankruptcy.
“If this weren’t enough, we learned that those workers in many cases were themselves Puerto Rican hurricane refugees, or had been helping their families rebuild after the hurricane. Angelo Gordon and Solus should immediately cancel any debt they hold on the island and make sure that the Toys R Us workers are given the restitution they need to support their families. Anything less would be inhumane,” Julio López Varona, director of Puerto Rico Campaigns with the Center for Popular Democracy and member of the Hedge Clippers Coalition said.
Solus manages $8 billion in assets, and Angelo Gordon manages $23 billion, according to the report.
Despite Solus’ investment “in $308 million of Toys R Us debt and their role in driving Toys R Us to liquidate, the hedge fund has refused to help pay into a hardship fund for Toys R Us workers who were fired and won’t take any responsibility for the company’s liquidation and resulting job losses,” reads a release announcing the report.
According to the Hedge Clippers report, days after Hurricane Maria struck Puerto Rico, Angelo Gordon was among a group of bondholders that offered the Puerto Rican government a new loan of $1.85 billion, “instead of debt relief,” the activists said.
The report comes ahead of the Toys R Us bankruptcy confirmation hearing, and on the heels of news that the company may be revived.
The group pointed to Solus CEO Christopher Pucillo’s interview with Pensions & Investments.
“In the interview, he hailed his hedge fund’s involvement in the American Airlines bankruptcy and its subsequent merger with U.S. Airways as an example of a major success, noting that the process cleaned up the company’s balance sheet, settled some ‘union issues,’ and sent the stock soaring. That bankruptcy, like many bankruptcies, was widely seen as a union-busting tool; the unions eventually threw their support behind the US Airways merger in order to escape draconian cuts in the bankruptcy process,” Hedge Clippers said.
The report includes profiles of former Toys R Us workers and their stories of how the closure of the stores they worked in hurt them.
Meanwhile, Angelo Gordon, the group said, also focuses on vulture strategies. The hedge fund purchased bankrupt phone service FairPoint’s secured debt, making it the company’s biggest shareholder, according to the report.
“With Angelo Gordon as its largest shareholder, the company began an aggressive campaign against its workers, cutting health benefits and freezing pensions. The workers fought back by going on strike, at one point picketing a meeting of the board of trustees of Colby College, where Michael Gordon holds a seat. The four-month strike—the longest in the telecommunications industry in decades—ended in February of 2015, when the unions ratified a new contract,” Hedge Clippers said.
After declaring bankruptcy last year, Toys R Us could have undergone a re-organization that would have preserved it, the report argues, but a group of five hedge funds with a strong enough investment position “to control the company’s future decided that they could squeeze more profit out of their investments if they forced it to shut down and sell off its assets,” the report reads.
“The group of hedge funds was led by Solus Alternative Asset Management, which had built up a large position in a layer of secured Toys R Us debt that gave it a powerful negotiating position, because owners of it had put up collateral for bankruptcy financing. As of June 2018, Solus owned $221 million of the $1 billion in B4 debt issued, a position it had built up over the course of the bankruptcy,” Hedge Clippers said.
“The price of the debt fell over the course of the bankruptcy proceeding, trading below 40 cents on the dollar then rebounded when the company announced it was liquidating its assets, selling above 50 cents on the dollar,” the report continues.
“Toys R Us leadership had been searching for ways to save the company, and developing plans for reorganization. But to buy themselves time to put a plan in place, they needed to secure a waiver of cash flow forecast requirements from the B4 creditors. The company received one two-month waiver in January, but B4 creditors, led by Solus, declined to offer an extension beyond one week, and under conditions that would have spelled doom for the company – requiring it not to pay vendors or landlords,” the report states.
At that point, Toys R Us decided that it had to shut down. Some 33,000 workers were laid off, without severance.
Leaders from Hedge Clippers and the Center for Popular Democracy called for the cancelation of the Puerto Rican debt with Solus and Gordon, and demanded that “no dollars should be transferred away from funding essential services on the island into the pockets of vulture speculators….”