Page 33 - RMAI Bulletin July 2024

RMAI BULLETIN JULY 2024

their exposure to various risks. Hedging against having difficulty selling many of the properties, an
investment risk means strategically using instru- example of the liquidity risk that can be associated
ments-such as options contracts-to offset the with real estate.
chance of any adverse price movements. In other
words, you hedge one investment by making an- In November 2018, the hedge funds and Toys "R" Us'
other. debt holders Solus Alternative Asset Management and
Angelo Gordon took control of the bankrupt company
Real-World Example of Financial Risk and talked about reviving the chain. In February 2019,

Bloomberg and other financial commentators point to The Associated Press reported that a new company
staffed with ex-Toys "R" Us execs, Tru Kids Brands,
the June 2018 closure of retailer Toys "R" Us as proof would relaunch the brand with new stores later in the
of the immense financial risk associated with debt- year. In late 2019, Tru Kids Brands opened two new
heavy buyouts and capital structures, which inherently stores-one in Paramus, New Jersey, and the other in
heighten the risk for creditors and investors.
Houston, Texas. Most recently, Macy's has partnered
with WHP Global to bring back the Toys "R" Us brand.
In September 2017, Toys "R'" Us announced it had In 2022, Macy's plans to roll out approximately 400
voluntarily filed for Chapter 11 bankruptcy. In a state- physical toy store storefronts within existing Macy's
ment released alongside the announcement, the locations.
company's chair and CEO said the company was work-
ing with debtholders and other creditors to restructure How do you Identify Financial Risks?
the $5 billion of long-term debt on its balance sheet.
Identifying financial risks involves considering the risk
As reported in an article by CNN Money, much of this factors a company faces. This entails reviewing corpo-
financial risk reportedly stemmed from a 2005 US $6.6 rate balance sheets and statements of financial posi-
billion leveraged buyout (LBO) of Toys "R" Us by mam- tions, understanding weaknesses within the company's
moth investment firms Bain Capital, KKR & Co., and operating plan, and comparing metrics to other com-
Vornado Realty Trust. The purchase, which took the panies within the same industry. There are several sta-
company private, left it with $5.3 billion in debt se- tistical analysis techniques used to identify the risk
cured by its assets and it never really recovered, areas of a company.
saddled as it was by $400 million worth of interest
payments annually. Conclusion
Financial risk can often be mitigated, although it may
The Morgan-led syndicate commitment didn't work. In be difficult or unnecessarily expensive for some to
March 2018, after a disappointing holiday season, Toys completely eliminate the risk. Financial risk can be
"R" Us announced that it would be liquidating all of its neutralized by holding the right amount of insurance,
735 U.S. locations to offset the strain of dwindling rev- diversifying your investments, holding sufficient funds
enue and cash amid looming financial obligations. for emergencies, and maintaining different income
Reports at the time also noted that Toys "R" Us was streams.

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