NOTE: To backup your connections, use the export connections tool in the Connection Manager to back it up to an XML file prior to following the steps below.
C:\Users\<User_Name>\AppData\Roaming\Quest Software\Toad for DB2 6.0
This will regenerate the missing folder and reinitialize your default settings. Proceed to import your connections using the backed up XML file. Then re-test the issue. Let me know if that works out.