January 28, 2011

While whistling in the dark, Borders says it has secured financing

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In a surprise announcement made after everyone went home last night, the Borders Group says it has had a life preserver thrown to it by the money-lending arm of GE, which has agreed to give the company $550 million. Reading between the lines of the announcement, however, or even just reading the lines, there’s as much reason for concern as there is for celebration, even though stock in the company robotically soared 43% in after hours trading following the news.

As a Wall Street Journal report by Nathan Becker noted, “The commitment is contingent on several conditions, such as the successful syndication of $175 million of the senior credit line with other lenders, as well as $125 million of junior debt financing from vendors and other lenders.” Those other lenders would be, for the most part, publishers, who had earlier been given until February 1st to decide whether or not to turn the debt owed them into “financing.”

A Bloomberg report seems to have badly misreported this story — it says Borders has already secured the “junior debt financing” deal with publishers and thus ran a story headlined “Borders to Receive $675 Million of Financing for Restructuring Amid Losses.”

But early yesterday, a story by Jim Milliot for Publishers Weekly had observed that publishers were actually “unhappy with the financial terms of the deal,” were “not convinced that the chain has a viable turnaround plan,” and were likely to “reject Borders’ proposal to exchange missed payments for notes.” Another report from Milliot after the announcement amplifies that the “extremely reluctant” publishers make the deal highly questionable.

The Borders announcement, of course, tries to strike as positive a note as possible — President Mike Edwards is quoted as saying, “We are confident that whatever path Borders pursues to implement its strategy, we will be able to count upon the support of our vendors, who understand the critical role a strong Borders provides to the reading public” — but it includes another surprise that may be a bow to the preferred strategy publishers would like to see the company take: for the first time in public, the company has said it isn’t ruling out “in-court restructuring.”

As Edwards puts it, “given the current environment surrounding Borders, and in order to assure that the company can pursue its efforts to position itself to properly implement its business plan, it is prudent as well for Borders to explore alternative avenues, including the possibility of an in-court restructuring.”

Which is to say, Borders has finally acknowledged it may not have much choice in the matter. And neither, it seems, may publishers.

Dennis Johnson is the founder of MobyLives, and the co-founder and co-publisher of Melville House. Follow him on Twitter at @mobylives

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