Borders Group Inc. (BGP) won a one-year extension of a loan from its largest shareholder, Pershing Square Capital Management LP, and said it would allow its right to compel a sale of its U.K.-based Paperchase gifts and stationery business to Pershing Square to expire.

"The extension of the loan gives us some necessary breathing room, which is important in the current economic environment," said Chief Executive Ron Marshall. "We are also pleased to retain Paperchase, which is a successful and important business throughout the U.K. and other markets as well as in our Borders superstores throughout the U.S."

Pershing Square, the fund run by activist investor William Ackman, agreed to the extension of the $42.5 million loan until April 1, 2010, on its current terms, including an interest rate of 9.8%, substantially below market for comparable financing.

Pershing Square made the loan last year and had already extended the deadline twice this year.

Borders also said it is resetting the strike price on Pershing Square's 14.7 million warrants to 65 cents a share.

Earlier this month, the struggling books and music retailer said it would cut 742 jobs, less than 3% of its work force, as it trims store management to match reduced sales volume.

Last month, Borders cut about 12% of its corporate work force and several high-level corporate positions to reduce management layers. In January, the company ousted its chief executive and his management team, installing Marshall, who has a financial background.

The book chain, like almost all retailers, had a disappointing holiday season. But its problems stretch back considerably further. A year ago, the company disclosed it faced a potential liquidity crunch and put itself up for sale. Despite its weak stock price, Borders couldn't find a buyer.

Borders' shares closed Monday at 65 cents, up 3.2%, and did trade after hours. The shares have fallen 95% in the past year.

-By Kathy Shwiff, Dow Jones Newswires; 201-938-5975; Kathy.Shwiff@dowjones.com