Borders Group (NYSE: BGP) received a small package from General Electric's (NYSE: GE) GE Capital arm last week -- a $550 million loan commitment to stave off creditors and possibly avoid bankruptcy. As thoughtful as this gift might be, it comes with activation conditions that will remind many parents of late Christmas Eve nights spent trying to assemble toys using cryptic directions.
Among GE Capital's contingencies for lending the money:
- $175 million of the commitment to be syndicated to other lenders.
- $125 million in additional financing on the part of Borders' lenders and vendors.
- "Financing arrangements" with vendors, landlords and lenders, to convert existing accounts payable to junior subordinated debt.
- A plan in place to close underperforming Borders stores.
- The completion of GE's "due diligence" of Borders' business and finances.
Borders' most recent balance sheet makes sense of GE's considerable caution. The beleaguered bookseller's book value is negative; in other words, its liabilities exceed its assets. Most of the liability side is "current" -- accounts payable, payroll, leases, and taxes. The company has little long-term debt, and one could argue that the GE arrangement is ultimately about converting short-term obligations into longer-term notes. By using the loans to pay current bills, the company could improve near-term cash flow.
Borders has lagged in the transition to electronic publishing, compared to larger rivals Barnes and Noble (NYSE: BKS) and Amazon.com (Nasdaq: AMZN). It was late in creating its own online web presence, with Amazon fronting Borders web store until 2008. It doesn't have a hot e-book reader like the Kindle or Nook. Revenue has declined in each of its last five years.
One of the most intriguing aspects of the GE Capital arrangement is the way GE is acting like a bankruptcy court, minus the due process. It dictates how Borders and its creditors must act if the loan is to be approved, including actions typically undertaken in a forced restructuring, like closing stores, arranging debtor-in-possession financing, and negotiating with vendors, landlords, and lenders.
While all of GE Capital's requirements seem like reasonable actions to keep the company viable, initial response from Borders' creditors has been lukewarm at best. If you were thinking about doing a little bottom-fishing in BGP stock, you might want to wait until GE has actually made the loan. And keep reading that fine print, however cryptic it may be.
