3rd UPDATE: Borders Enters Chapter 11, Plans To Close 30% Of Stores

(Adds judge holding off ruling on store closing procedures)

 
   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 payi7ng 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.

Gonzalez held off ruling on Borders' motion establishing its store-closing procedures, saying that matter would be heard Thursday morning at 10 a.m. Several parties objected to that motion, saying Borders' landlords should have sufficient notice about the procedures. Gonzalez, and even a Borders lawyer, called it a "1-in-10" scenario that a judge would approve the closing of 200 stores on the first day of a retailer's bankruptcy.

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 a $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.

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; [e-mail]

--Jacqueline Palank, Mike Spector and Maxwell Murphy contributed to this article.