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Real World Example of Financial Risk

Bloomberg and other financial commentators point to the June 2018 closure of retailer Toys "R" Us as proof of the immense financial risk associated with debt-heavy buyouts and capital structures, which inherently heighten the risk for creditors and investors.
In September 2017, Toys "R'" Us announced it had voluntarily filed Chapter 11 bankruptcy. In a statement released alongside the announcement, the company's chair and CEO said the company was working with debtholders and other creditors to restructure the $5 billion of long-term debt on its balance sheet.
As reported in an article by CNN Money, much of this financial risk reportedly stemmed from a 2005 US$6.6 billion leveraged buyout (LBO) of Toys "R" Us by mammoth investment firms Bain Capital, KKR & Co., and Vornado Realty Trust. The purchase, which took the company private, left it with $5.3 billion in debt secured by its assets and it never really recovered, saddled as it was by $400 million worth of interest payments annually.
The Morgan-led syndicate commitment didn't work. In March 2018, after a disappointing holiday season, Toys "R" Us announced that it would be liquidating all of its 735 U.S. locations in order to offset the strain of dwindling revenue and cash amid looming financial obligations. Reports at the time also noted that Toys "R" Us was having difficulty selling many of the properties, an example of the liquidity risk that can be associated with real estate.
In November 2018, the hedge funds and Toys "R" Us' debt holders Solus Alternative Asset Management and Angelo Gordon took control of the bankrupt company and talked about reviving the chain. In February 2019, The Associated Press reported that a new company staffed with ex-Toys "R" Us' execs, Tru Kids Brands, would relaunch the brand with new stores later in the year. In late 2019, Tru Kids Brands opened two new stores—one in Paramus, New Jersey, and the other in Houston, Texas.
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