KB Toys files for bankruptcy

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By Emily Chasan and Aarthi Sivaraman

NEW YORK/HONG KONG (Reuters) - KB Toys Inc, one of the largest U.S. toy retailers, filed for Chapter 11 bankruptcy protection on Thursday, with a plan to close all its stores and begin liquidation sales in the middle of the holiday season.

KB Toys is the latest retailer to succumb to a sharp decline in consumer spending this year. Others like apparel retailer Steve & Barry's to jeweler Whitehall Jewelers Holdings filed for bankruptcy protection earlier this year and started selling their merchandise at deep discounts.

"The liquidity crisis is directly attributable to a sudden and sharp decline in consumer sales due to macro-economic forces," KB Toys said in court papers.

KB Toys, which runs about 460 stores, said it will try to find a buyer for its wholesale distribution unit as it conducts going-out-of-business sales.

KB Toys filed a petition in U.S. Bankruptcy Court in Delaware, along with eight affiliates, listing assets of $100 million to $500 million, and liabilities in the same range.

Shares in Hong-Kong based Li & Fung Ltd plummeted as much as 15 percent on Friday after the U.S. firm listed the Asian consumer goods exporter as its largest creditor with a claim of about $27.2 million. U.S. toymaker Mattel Inc was the next largest creditor, with a $1.3 million claim.

But Li and Fung -- which earned commissions as a procurement agent for KB Toys -- said its exposure actually stood at just $5 million, because much of the stated figure of $27.2 million was in fact owed directly by KB Toys to suppliers.

Li & Fung stock also suffered from steep losses in Hong Kong's broader market, after the collapse of a $14 billion rescue plan for ailing U.S. auto makers threatened to further hammer the already weakened U.S. economy.

KB Toys, which started in 1922 as a family-owned business, previously filed for bankruptcy protection in 2004 and emerged from bankruptcy in 2005 after selling itself to Prentice Capital Management Inc.

At that time, KB Toys got $20 million in funding from an affiliate of Prentice. In exchange for the funding and a seasonal overadvance credit facility of up to $25 million, the Prentice affiliate got 90 percent of the common stock, while the remainder was to be held by a trust for the benefit of unsecured creditors of KB Toys entities being reorganized.

KB Toys' liquidation sales will start about half way into the holiday shopping season, which traditionally kicks off on the day after the Thanksgiving holiday.

But worries are mounting about this year's holiday sales, which could be the worst since the early 1990s, as consumers facing higher costs, a credit crunch and mounting job losses cut back on spending.

KB Toys suffered a "sudden and sharp decline in consumer sales due to macro-economic forces" during its most critical selling season, Raymond Borst, the company's controller, said in a court affidavit.

For the period from October 5 through December 8, same-store sales dropped almost 20 percent from the year-earlier period.

KB Toys said it has 10,850 employees, about 6,515 of whom are seasonal. About 277 stores are located in malls and 30 operate seasonally and were set to close in January.

The company did not obtain traditional debtor-in-possession financing and instead is seeking court approval to use cash collateral to pay operating expenses, including payroll.

The company's first bankruptcy court hearing is set for Friday.

(Additional reporting by Edwin Chan; Editing by Jeffrey Benkoe, Andre Grenon, Richard Chang)

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