Call it Psychic April Fool’s week: this is one of those weeks when the two major stories are clear from the beginning, but either narrative is subject to plenty of surprises. First up is Borders, which faces an April 1 deadline on their $42.5 million loan from major shareholder Pershing Square. The company would normally report fourth quarter and full-year earnings on or about that same day, but has yet to announce a release date. Presumably results–and the accompanying SEC filing–won’t be announced until the company can speak authoritatively to its forward plans.
While most accounts are focused on the Pershing loan, as we’ve written in the past the much larger long-term issue is the company’s revolving credit agreement with the Bank of America, which expires next year. Pershing’s loan is modest, pays good interest, and could easily be extended–but the company cannot function without a substantial line of credit. Pershing’s decision may be linked to the Debtwire report from early March–not confirmed by any other source–that the Bank of America is trying to finance a second lien of $100 million to bring in additional capital.
Popular stories also assess the likelihood of a Chapter 11 filing if the company cannot refinance shortly, but the larger concern should be whether circumstances could force the bookseller to file for a Chapter 7 liquidation. A Chapter 11 filing would still require fresh financing–and Pershing Square is a small creditor as well as the leading equity-holder (and a Chapter 11 filing would normally wipe out the equity owners), while the other major creditors (the bank and vendors) are vital stakeholders for ongoing operations.
In the best (or worst) circumstances, the company will clarify many of the key issues before the end of the week. The stock market has been betting on survival ever since Pershing Square head Bill Ackman told the stock to rise in early February by saying on CNBC that “I don’t see [Borders] as a likely bankruptcy.” Of course in 2008 he told Charlie Rose how he favored reorganization procedures as a normal business event over government bailouts, so he’s covered either way.
Detroit Free Press