A toy story.

• Author: Pearce, Harry J.
• Position: Asset securitization for Tyco Toys

Companies with non-investment-grade ratings usually don't opt for asset securitization. But for Tyco Toys, an unusual securitization strategy was key to reducing its skyrocketing costs.

Nineteen ninety-two was to be a break-out year for U.S. toy manufacturer Tyco Toys. The previous year's results were encouraging - net income of $18 million on sales of $549 million - and Tyco had many of the hottest-selling toys in the country, including the Little Mermaid fashion dolls and the Incredible Crash Dummies action figures.

The company's investment-grade credit rating helped it secure capital to acquire Universal Matchbox, the die-cast car maker, and Illco Toys, a major Sesame Street licensee. Matchbox's partially developed international distribution system provided Tyco with the opportunity to accelerate its own expansion into foreign markets and become a major international toy distributor. But while Tyco's sales in 1992 jumped to $769 million, net income remained flat because of significant costs related to the acquisitions, including a major effort to combine duplicative distribution systems.

Problems escalated in 1993. Sales of the Incredible Crash Dummies and the Little Mermaid product lines fell by more than $50 million compared to 1992 levels as the toys lost popularity among kids. Sales of Sesame Street licensed toys were hurt by strong competition in the preschool aisle, and higher video game sales affected sales of Tyco's boys' toys. To compound matters, the toy industry suffered a poor Christmas retail season in the United States, while many European markets went into an economic recession. The net result was a loss of $70 million on sales of $730 million.

FINANCE FATIGUE

By 1994 Tyco began to turn things around, but there are no quick fixes in the toy industry. Long lead times are the rule because of the cycle of product development, previews, child testing and engineering, with tooling and production in Pacific Rim countries adding even more time to the cycle.

Nevertheless, Tyco's U.S. operations returned to profitability in 1994, and overall sales for the year increased modestly to $753 million. The poor economic conditions in Europe, however, compounded problems in Italy, Germany, France and the United Kingdom, resulting in lower sales and a large operating loss from international operations. Tyco's direct import operations were still recovering from weak product sell-through in 1993 and posted disappointing results. The company...