Borders Asks for Critical Loan Extension to Stay Afloat


Troubled book-retailer Borders (BGP), which has already weathered a CEO switch and layoffs at its headquarters in 2010, is now looking to give itself just a little bit more breathing room. According to Debtwire, Borders has asked lenders to hold off on calling in the balance of a Bank of America-arranged loan set to mature in July 2011 -- and the measure appears to have been instigated by the loan's primary guarantor, Bank of America (BAC).

The "amend and extend" procedure, should it come to pass, hinges on a number of demands: Borders would have to raise at least $75 million of new funding to repay part of the outstanding $360 million balance on the loan, and satisfy leery loan holders that their money won't disappear entirely if the retailer files for bankruptcy.

Back in February, Bank of America sent out feelers about a new, more stringent loan package with tiers of liens that would kick in should the retailer go bust. Not only would there now be a second lien available -- to the tune of $100 million -- but creditors could first seize intellectual property (as in, the merchandise for sale in the stores) to recoup their lost investments.

Borders could use all the financial help it can get, because if the the current loan remains unchanged, according to the credit agreement which backs it, a 1.1x fixed charge ratio kicks in if the retailer's borrowings exceed 90% of the maximum amount permitted. Right now, Borders would not be able to abide by the terms of that agreement. And questions that emerged in January about Borders' ability to pay vendors in a timely fashion are still unresolved (though company spokespeople have denied any problem regarding those payments.)

But this Bank of America-led restructuring plan also appears to reflect the confidence of the company's primary stakeholder, Pershing Square Capital, whose CEO, William Ackman, claimed last month that bankruptcy was a "low probability" for the retailer. Of course, Pershing Square has a vested interest in keeping the chain alive, since it has its own $42.5 million loan coming due on April 1 -- unless that deadline, too, is extended.