© Photographer: Jeff Kowalsky/Bloomberg A stop sign stands in front of a Borders Group Inc. bookstore that closed last month in Farmington Hills, Michigan.
Borders Group Inc., the second- biggest U.S. bookstore chain, filed for bankruptcy in New York today after management changes, job cuts and debt restructuring failed to make up for sagging book sales in the face of competition from Inc. and Wal-Mart Stores Inc.

Borders plans to keep operating and restructure with $505 million in so-called debtor-in-possession financing from lenders led by GE Capital, according to a statement. The 40-year-old chain listed debt of $1.29 billion and assets of $1.28 billion as of Dec. 25 in its Chapter 11 petition filed today in U.S. Bankruptcy Court in Manhattan.

The reorganization is only possible if Borders immediately closes 200 of its 642 stores, according to an emergency motion to sell furniture and merchandise filed in Manhattan bankruptcy court today. Sales need to start no later than Feb. 19 to take advantage of the President's Day long weekend, and another 75 stores may need to close if concessions aren't won from landlords, the company said.
© Photographer: Jeff Kowalsky/Bloomberg A Borders Group Inc. bookstore that closed last month stands in Farmington Hills, Michigan.

"Closing the stores right away is essential because the Debtors are losing approximately $2 million per week at the closing stores," lawyers for Borders wrote in court pleadings.

Market Value

Borders, whose market value has shrunk by more than $3 billion since 1998, racked up losses by failing to adapt to shifts in how consumers shop. Its first e-commerce site debuted in 2008, more than a decade after revolutionized publishing with online sales. The world's largest online retailer beat it again by moving into digital books with the Kindle e-reader in 2007, a market Borders entered in July.

"Borders Group does not have the capital resources it needs to be a viable competitor," the company's president, Mike Edwards, said today in a statement. The bankruptcy will give it "time to reorganize in order to reposition itself to be a successful business for the long term."

"Instead of leading and being innovative, they were certainly a follower," said Michael Souers, an analyst for Standard & Poor's in New York.

Borders, based in Ann Arbor, Michigan, began looking for a cash infusion in December. It said lenders cut its borrowing capacity, and that failure to find replacement credit could lead to a violation of its loan agreements and a "liquidity shortfall" in the first quarter of 2011.

Cash Drain

The company has 642 stores under the Borders, Waldenbooks, Borders Express and Borders Outlet names in the U.S. and Puerto Rico, according to the court filing.

"It buys them a little bit of time, because they are closing stores that are a drain on cash flow," said Peter Wahlstrom, a retail analyst for Morningstar Investment Services in Chicago. The bankruptcy filing "allows them to retrain their focus on the stores that are profitable."

The company owes $302 million to vendors for inventory and has $109 million in guarantees for liquidated foreign units, it said it its filing. Among the stores being closed are three in Manhattan.

Penguin Putnam, a unit of Pearson Plc, was listed as the largest unsecured creditor with a $41 million claim. Hachette Book Group has a claim of $36.9 million and Simon & Schuster Inc. has a claim of $33.8 million. Random House, the publisher owned by Bertelsmann AG, Europe's biggest media company, has a claim of $33.5 million.

Deal With Liquidators

Borders has a deal with liquidators Hilco Merchant Resources LLC, SB Capital Group LLC and Tiger Capital Group to guarantee it 73 percent of the cost value of all merchandise at the closing stores, which Borders estimates will bring in $131 million to $148 million to repay its creditors.

The offer, structured as a "stalking horse bid" is subject to higher and better offers, and calls for the liquidators to fund store level expenses while the locations close. It also gives Borders a 50 percent share of any proceeds after a 5 percent fee and expense recovery.

Before its bankruptcy, Borders had already started a plan to close more than 260 stores, and those locations are stocked with "quickly dwindling merchandise" that make it necessary to close them right away, Borders said in court papers. The agreement with liquidators calls for a break-up fee of $1 million if a better offer is received at an auction.


Borders' debt includes a $970.5 million revolving loan under an agreement from March 2010, with Bank of America Corp. and General Electric Capital Corp. as agents to other lenders. About $196.05 million was outstanding as of the bankruptcy, lawyers for Borders wrote. A term loan taken at the same time, worth $90 million, had $48.6 million outstanding.

Borders estimated that funds would be available for distribution to unsecured creditors, according to the filing signed by the company's chief financial officer, Scott Henry.

The company in May raised $25 million in a private sale to an entity controlled by Bennet S. LeBow, who was then named CEO and chairman. Pershing Square Capital Management LP, the hedge fund run by William Ackman, is Borders's largest shareholder, according to the filing. Borders' biggest shareholders also include Zurich-based UBS AG, according to the court filing.

In its petition, Borders says Pershing Square holds 31.3 percent of the stock and LeBow is a 15.4 percent stakeholder.

The New York Stock Exchange suspended trading in Borders shares today and is moving to delist the company. The shares traded at a 52-week high of $3.29 last April 12.


Kasowitz, Benson, Torres & Friedman LLP is the law firm that filed the petition and Jefferies & Co. is handling restructuring.

Borders has struggled with cash levels since at least 2008, when it ran short of money and was forced to borrow from Pershing Square, its largest shareholder at the time. After missing a deadline to find a buyer, the company issued 5.15 million warrants to Pershing, making the fund the bookseller's largest investor.

Borders borrowed $42.5 million from Pershing to remodel stores and upgrade technology to compete with Barnes & Noble Inc., the largest bookseller in the U.S., and Cost- savings measures have been implemented over the past year.

In January 2010, Borders announced it would close some of its bookstores in the U.S. and cut 11 percent of staff at its headquarters and eliminate 76 other jobs. Chief Executive Officer Ron Marshall resigned after a year on the job. Michael Edwards was put in a role as interim CEO.

Delayed Payments

Borders delayed payments to publishers in December as part of a plan to restructure financing arrangements with vendors. The stock lost more than a fifth of its market value, its biggest drop in two years, after the announcement.

Kmart Corp. acquired Borders in 1992, then a chain of about 20 stores founded by Tom and Louis Borders, for about $190 million and combined the retailer with its Waldenbooks unit.

In 1995, Kmart renamed the unit Borders Group Inc. and spun it off in an initial public offering. The new public company, with a market value of about $500 million, had more than 1,000 locations under the Borders, Waldenbooks and Planet Music brands and generated $1.5 billion in revenue.

Borders then joined Barnes & Noble in dotting the U.S. with book superstores that proved to be more profitable than its mall-based Waldenbooks locations. The superstore unit grew to 200 by 1996 and doubled by 2002.

"They over-expanded and built up some debt on their balance sheet," said Souers, who has covered Borders for six years. "There was also less control to those businesses."

Borders has asked court permission to keep its customer- rewards program, serving 42 million members, and honor obligations to its employees, which include 6,100 full-time workers and 11,400 part-time employees.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York.

Michael Norris, senior analyst at Simba Information Inc., discusses the outlook for Borders Group Inc. following its chapter 11 filing. Borders, the second-biggest U.S. bookstore chain that filed for bankruptcy today, received a financing commitment from GE Capital and investment firms Tennenbaum Capital Partners, LLC, a unit of Stone Tower Capital, LLC and GB Merchant Partners, LLC for $505 million in bankruptcy loans. Norris speaks with Mark Crumpton on Bloomberg Television's "Bottom Line."