Analysis: Bankruptcy may be next storyline for Borders
NEW YORK (Reuters) - Borders Group Inc may find that filing for bankruptcy is the next plot turn in its many-chaptered struggle to survive.
Bankruptcy court could push the second-largest bookstore chain, its lenders and book publishers to make sacrifices and give the company a chance to keep going. As it stands now, publishing sources see little progress in financial talks with lenders, and the company continues to need cash.
Borders President Mike Edwards said on Thursday in a statement announcing a conditional credit agreement with GE Capital that while refinancing is preferred, restructuring in court -- referring to a bankruptcy filing -- is a possibility it is considering.
Borders spokeswoman Mary Davis declined to comment beyond that statement.
The standoff comes after a year in which Borders has cut costs, refinanced and brought in new investors to cope with shriveling sales and market share.
Now the company has stopped payment to some vendors and even asked its most important suppliers -- the book publishers -- essentially to loan it the money due for books shipped months ago.
Only with those concessions by publishers as well as other new landlord and vendor financing agreements will the company's bank replace a maturing credit line.
"Bankruptcy is a wonderful tool for taking the majority of interests and implementing a plan that may be over the objections of a minority of interests," said Michael Epstein, a managing partner at restructuring advisory firm CRG Partners who is not involved in the situation.
The company would be able to close unprofitable stores more easily and publishers would begin getting paid again in most cases for any products shipped in bankruptcy, he said.
On the other hand, he cautioned, the company would need to have a plan for the changes it wants to ensure that it closes the right stores before the clock runs out.
Since 2005, bankruptcy law has allowed only about 9 months for retailers to easily close stores -- a deadline many industry players say is one of the reasons why Circuit City ended up quickly liquidating its assets in bankruptcy.
In a bankruptcy restructuring, the company will likely not be obligated to pay publishers for the books it shipped before the bankruptcy filing, according to Ken Simon, a managing director at Loughlin Meghji restructuring advisory firm who is not involved in the matter.
If the restructuring stays out of court, the vendors will have to be paid back in full or agree to a cut.
"The lack of liquidity is the reason why companies have to go into bankruptcy," Simon said.
On Thursday, the company said GE Capital had agreed to finance $550 million in debt if it can secure $125 million of junior debt and other financing agreements with vendors and landlords.
Publishing sources say they are still waiting to hear more before they decide if they will extend new financing terms.
"I don't know there is a lot of optimism on the publishers' part that Borders and GE Capital can agree to terms that will give a renewed confidence in their ability to move forward and be a viable retailer and a financially stable one that pays their bills promptly," a publishing executive who has been briefed on the discussions but did not want to be identified because of the sensitivity of the negotiations told Reuters.
Despite weeks of meetings about the new financing, Borders did not provide any details, the publishing source said on Friday.
"If somebody asks you for a loan, you want to know what the terms are. Without knowing the terms it's difficult to make an evaluation," the source said. "We are not looking for Borders to go under. On the other hand, they are not giving us much to encourage us to reach out and tie the knot on the lifeline."
LOSSES RISE, SO DOES STOCK
Ann Arbor, Michigan-based Borders has been trying for years to cut costs by closing many Waldenbook stores and decreasing employees.
Meanwhile, its finances have continued to suffer. It posted a third-quarter operating loss of $74.4 million, nearly twice as large as a year earlier. It had short- and long-term debt of $952.5 million as of October 30 and owed its suppliers, including publishers, another $444.9 million. That compares with third-quarter sales of $470.9 million, which were 17.6 percent lower than a year earlier and followed two years of double-digit comparable sales declines.
Shares in Borders rose 36 percent on Thursday after the company announced the potential financing commitment and added 4 cents -- 5.3 percent -- to close at 85 cents on Friday.
Michael Souers, a retail analyst at Standard & Poor's Equity Research, said he thought the trading was speculative, perhaps by hedge funds, trying to trade quickly.
In addition, doubts about Borders' viability have attracted short sellers. The percentage of Borders shares held short, meaning investors are betting that they would fall in value, doubled to 10 percent as of January 14 from December 31. On average, 3.5 percent of shares of a New York Stock Exchange-listed company are held short.
"The logical conclusion of this is probably Chapter 11 and I think it'll happen sooner rather than later," Souers said.
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