(Adds details from bankruptcy court hearing.)
By Joseph Checkler and Eric Morath
Of DOW JONES DAILY BANKRUPTCY REVIEW
Borders Group Inc. (BGP) made its first appearance in bankruptcy
court Wednesday afternoon after filing for Chapter 11 protection to
shed its physical presence and restructure its burdensome debt.
Chief Judge Arthur Gonzalez of U.S. Bankruptcy Court in
Manhattan approved the most important of Borders' first-day
motions, allowing the company to tap on an interim basis $400
million of its $505 million bankruptcy financing from GE Capital to
fund itself while in bankruptcy.
Gonzalez also approved several other routine Borders motions,
including giving the company the right to use its cash management
system and bank accounts and also continue paying most of its
17,500 employees.
Battered by competition from Internet retailers and e-books,
Borders filed for Chapter 11 protection Wednesday and said it will
close about 30% of its 642 stores nationwide in the coming
weeks.
The struggling operator of the Borders and Waldenbooks chains
sought protection from its creditors in the U.S. Bankruptcy Court
in Manhattan a month after it warned it may have to restructure the
company in Chapter 11.
"This is a debtor that's seeking rehabilitation, indeed seeking
rebirth," said David M. Friedman of Kasowitz Benson Torres &
Friedman LLP, a lawyer for Borders. Friedman said that while jobs
will be lost, Borders will try to save as many as possible.
The Ann Arbor, Mich. company's $505 million bankruptcy debt from
GE Capital to fund its operations while in bankruptcy comes in many
tranches, and includes both a $55 million term loan and $410
revolving loan. Several lawyers objected to elements of the loan
agreement, including the fact that Borders didn't release a
detailed budget as to how it will use the money from the DIP
financing.
Friedman originally said there is a budget, but that it contains
confidential information that Borders doesn't want to release to
the public. The judge said the budget should be public, and
Friedman eventually agreed.
Borders' five largest unsecured creditors are the book
publishers Penguin Putnam Inc., Hachette Book Group, Simon &
Schuster Inc., Random House and Harper Collins Publishers.
In his first-day declaration filed with the court, Borders Vice
President and Chief Financial Officer Scott Henry said Borders aims
to stay viable by enhancing its customer rewards program,
strengthening its e-book business and expanding more into non-book
products.
In the past year, Borders has already begun shifting the focus
away from its physical presence by halting expansion plans and
identifying unproductive stores for closure. At the same time, the
company reworked its customer loyalty program, overhauled its
website and introduced a digital book store.
Borders released its list of 200 stores that will close, and
said it has hired Hilco Trading LLC to liquidate them.
The filing comes after Borders unsuccessfully sought to avoid
bankruptcy by striking a tentative deal with GE Capital for a new
$550 million secured line of credit. But the retailer first had to
hit certain benchmarks, such as negotiating more favorable store
leases with its landlords and finding other lenders to take on $175
million of the credit line.
The deal also required Borders to raise another $125 million in
junior debt, which the retailer sought to do by asking the
publishers whose books line its shelves to forgive unpaid bills in
exchange for debt that Borders could then repay. But most
publishers haven't welcomed the overture.
To boost its liquidity, Borders last month announced it would
delay payments to its vendors, landlords and other key creditors.
But the retailer had acknowledged that and other cost-cutting moves
might not be enough to keep it out of Chapter 11, so it also
announced that it was exploring an in-court restructuring.
In its bankruptcy petition, Borders listed assets of $1.28
billion and liabilities of $1.29 billion as of Dec. 25, 2010.
Brick-and-mortar booksellers like Borders, second in size only
to Barnes & Noble Inc. (BKS), have battled competition from
Internet-only retailers such as Amazon.com Inc. (AMZN) and the
advent of digital books and e-readers.
In the past year, Borders has tried to shift its focus away from
its physical presence by halting expansion plans and identifying
unproductive stores for closure. At the same time, the company
reworked its customer loyalty program, overhauled its website and
introduced a digital book store.
Last March, Borders and its lenders struck a deal to amend its
debt. Lenders led by Bank of America Corp. (BAC) agreed to provide
a $970.5 million secured revolving credit facility, while an
affiliate of liquidation firm Great American Group led another
lender group behind a $90 million secured term loan.
The retailer in July sold off its Paperchase line of stationery,
cards and gifts for $31.2 million, the bulk of which--$25
million--it was required to put toward reducing its debt under a
$90 million term loan facility.
The case has been assigned to Judge Martin Glenn of the New York
bankruptcy court, although Glenn was unavailable for the first-day
hearing. The case number is 11-10614.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection.)
-By Joseph Checkler, Dow Jones Newswires; 212-416-2152;
joseph.checkler@dowjones.com
--Jacqueline Palank, Mike Spector and Maxwell Murphy contributed
to this article.