Toys R Us isn't a public company, but its bankruptcy filing two days ago is already sending shockwaves through the stock market.
Feeling the heat is Mattel, the retailer responsible for the wildly popular Barbie and Hot Wheels brands, and also one of Toys R Us' most important suppliers. The company's stock dropped 6% on Monday amid news of the retailer's Chapter 11 filing, hitting its lowest level since 2009.
And traders are betting that the pain is just getting started. Short interest on Mattel's stock — a measure of wagers that share prices will drop — has climbed to 16% of shares outstanding, according to data compiled by IHS Markit. It's more than tripled since April and now sits at the highest since February 2016.
And it could get even worse, with the positions held short representing only a third of available shares.
That level of short interest is "massive," Simon Colvin, an equity and credit markets analyst at IHS Markit, told Business Insider. "The spike in negative sentiment coincides with the troubles faced by Toys R Us. The large remaining borrow pool also means that its still very cheap to short Mattel shares."
The turmoil stirred up by the Toys R Us bankruptcy has also caused pain for the asset managers responsible for taking the company private in 2005. Back then, KKR, Bain Capital, and Vornado Realty Trust acquired the toy retailer in a $7.5 billion leveraged buyout, and now find their investment wiped out.
Holders of Mattel stock may find some solace in the fact that at least some Toys R Us stores may remain open. Chapter 11 bankruptcy is a way for the company to restructure and renegotiate its roughly $5 billion debt burden. Business Insider's Kate Taylor points out that retailers such as Eddie Bauer and Aeropostale have kept stores open despite filing for bankruptcy, though both brands did ultimately close locations.
Regardless of what fate befalls Toys R Us, Mattel would be wise to expand its e-commerce efforts. After all, just because a classic brick-and-mortar institution is falling on hard times doesn't mean kids will stop wanting some of the world's most popular toys.
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