Monday, January 17, 2011

Borders: We Really Might Not Know Until Groundhog Day

Friday's Publisher's Lunch compared Borders' presentation to publishers on Thursday as Groundhog Day--a repetition of the same basic plan they had been talking about since late December--and it also appears that there may not be a final decision on the bookseller's fate until Groundhog Day itself, the rough deadline set by Borders.

The WSJ adds the name of the law firm that is representing Borders in the restructuring talks (Kasowitz, Benson, Torres & Friedman), and provides an estimated amount for the new credit line under negotiation with GE and others: "$500 million or more." That is considerably less than the $900 million line that originally was to expire this summer, and the subsequent $700 million line that was to kick in thereafter. 

The Journal adds that the new capital might allow Borders to "repay some $220 million in current outstanding senior debt," which is thought to be the current amount outstanding on their revolving line of credit. As of October 30, the company had drawn $294.9 million against their credit line (which stood at $232.3 million a year ago on January 30 with the addition of holiday sales). They also owed $59.9 million on their term loan. And then there were the biggest creditors of all, trade vendors, owed $444.9 million at the time. That's roughly $800 million owed--before accrued payroll and a variety of other liabilities, against, at full value, $895.8 million in trade inventories.

The Journal's account says "a possible sweetener was floated to provide [publishers] with collateral for the note"--but publishers have told us Borders has been offering vague promises of collateral all along for the loan they want vendors to provide. But the company's major asset is inventory, against which the lenders have held first security (and they also have had claim on Borders intellectual property and other assets), so it still isn't clear what the retailer would offer to back the loan.

There appears to be no mention of the equity holders--who want publishers to refinance the company rather than reorganize under bankruptcy protection so that their own shares are protected--injecting more cash into the company. The paper says GE 'wants publishers to show 'shared sacrifice,'" though it's not clear that any other parties (except perhaps some leaseholders) sacrifice anything under the terms that are being proposed to publishers. Bennett LeBow put up a mere $25 million and bought essential control of the company; publishers owed $40 million to $60 million each are being asked to wait years for a payoff the company may never be able to make with no equity or other compelling consideration. (When Pershing Square loaned the company just $42.5 million, backstopped by hard assets, they got 12.5 percent interest and big package of warrants.)

As has been maintained all along, a "person familiar with the matter" insists that "Kasowitz wouldn't prepare a bankruptcy filing for Borders except under a worst-case scenario." As we've pointed out before, that may be the essential problem. LeBow (and to a lesser extent Pershing Square) how worked furiously to avoid what's probably the company's best shot at long-term survival--in-court reorganization--because it would wipe out the equity holders. Even though Pershing Square's Bill Ackman has made it clear in the past how much he supports our "reorganization" procedures. Look at what he said about GM on Charlie Rose: "It has been hamstrung for years because it has too much debt and it has contracts that are uneconomic.The way to solve that problem is not to lend more money. They should do prepackaged bankruptcy.''

Remember that under bankruptcy code, it only requires three creditors to file a petition for involuntary bankruptcy if publishers believe that it is the best way to proceed. So it may be time to write less about whether Borders intends to file, and more about whether publishers will force a filing in the face of a deal that seems to ask them to bear the costs of keeping the bookseller going.
* From today's Publisher's Lunch

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