Originally published Nov. 24, 2023, 9:30 a.m. ET | Updated: Nov. 24, 2023, 1:52 p.m. ET
As the U.S. toy industry ramps up to the holiday homestretch on Black Friday, one of Canada’s leading toy retailers faces an uncertain future.
Mastermind GP and Mastermind LP, best known as Mastermind Toys, sought and obtained an initial order on Nov. 23 for creditor protection under the Companies’ Creditors Arrangement Act (CCAA) from the Ontario Superior Court of Justice (Commercial List) in Toronto. The process is similar to bankruptcy protection in the U.S.
As a leading specialty retailer of toys, games, and books across Canada, Mastermind Toys plans to keep its 66 stores open for business — and honoring holiday promotions — for the time being, as the CCAA proceedings unfold.
In a statement issued this morning, Mastermind Toys cited a range of factors shaping its “difficult but necessary decision to seek creditor protection,” including “increasing competition, disruptions from the COVID-19 pandemic, and more recently a deteriorating macro-economic environment.”
The company says that it has implemented operational improvements and cost reductions alongside a strategic review and exploration of a sale. Despite these efforts, Mastermind Toys says “the challenges facing the company’s business have become too significant to overcome.” Those challenges include a 22% year-over-year sales decline in 2023 and a highly leveraged balance sheet with loans dating back a decade.
Alvarez & Marsal Canada has been appointed as the CCAA Monitor.
As part of this week’s filing, Mastermind Toys seeks Court approval to begin an initial wave of store closures “while it explores certain strategic alternatives for the remainder” of its stores.
The Toy Book has reviewed the initial pre-filing documents from Nov. 22 along with the Court’s initial motion issued on Nov. 23.
Mastermind Toys: Case Highlights as of 11/24/2023
- CIBC is the main operating and senior secured lender to the Mastermind Entities pursuant to a credit agreement dated October 24, 2014.
- Pursuant to the CIBC Credit Agreement, CIBC and the Lenders committed a revolving loan facility in an amount of up to $30 million and a term loan facility in the principal amount of $6.25 million.
- As of October 31, 2023, Mastermind LP’s secured obligations owing to CIBC were approximately $25.7 million, comprised of approximately $19.5 million owing under the CIBC Revolving Loan Facility, and $6.25 million owing under the BCAP Term Loan Facility.
- Mastermind says that amid the COVID-19 pandemic, “the BCAP term loan provided much-needed liquidity during 2021 and 2022, [but] Mastermind LP has not generated sufficient cash flow to pay down the debt, saddling Mastermind LP with a highly leveraged balance sheet.”
- In fiscal 2022 and for the trailing twelve-month period ended October 31, 2023, Mastermind LP reported EBITDA of negative $4.0 million and negative $7.2 million, respectively, and a net loss in each of its past six fiscal years, excluding 2021.
- Since October 2022, Mastermind LP has been in default of the CIBC Credit Agreement as a result of its failure to maintain a specified fixed charge coverage ratio required thereunder.
- Since April 2023, Mastermind LP has also been in default of the CIBC Credit Agreement for failure to maintain the minimum EBITDA covenant required thereunder.
- On November 13, 2023, counsel for CIBC sent notice of such defaults to Mastermind LP
- The company entered into talks of a sale in April 2023, but the transaction stalled due to a variety of factors.
- A going-concern transaction may occur with a potential purchaser who has been in “accelerated talks” to buy Mastermind Toys in recent weeks.
- If the proposed transaction is not finalized imminently, the Mastermind Entities will have no choice but to commence a full liquidation of all 66 of their retail locations.
- Mastermind Toys has approximately $35 million in inventory on hand.
- It’s suppliers are based primarily in Canada, the U.S., and Asia.
- LEGO, Mattel, Hasbro, Spin Master, and Ravensburger are named as “key suppliers.”
- Unsecured creditors are owed approximately $22.2 million, of which $19.6 million is owed to merchandise vendors.
A case website can be viewed at this location.
