January 20, 2010 4:13 pm

Small publishers contemplate life without Borders

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

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As bookstore chain Borders Group struggles to stop bleeding cash, management is playing a risky game of favorites by only paying some of the publishers it trades with, according to six suppliers interviewed by Debtwire. The company is paying its largest vendors in timely fashion but is in growing arrears to a number of smaller publishing houses, some of whom are preparing to take legal action.

A group of publishers supplying Borders have retained the bankruptcy group of Lowenstein Sandler as legal counsel concerning mounting receivables from the nation’s second biggest bookseller, said two sources familiar with the situation. The group approached management with inquiries about a potential restructuring, its payment plans and the state of operations but never received a response, said one of the sources.

“Some publishers are having a hard time getting paid in a timely fashion,” said one publishing executive. “[Borders] have been extending payables… and most publishers have cut back on what they will advance,” said the same source.

Three major publishers said they received payments in full from Borders for the December period but three smaller firms said the company has been delaying payments.

The average time it took for Borders to pay back suppliers spiked over 40% to 97.9 days in the year ended 31 October, from 69.4 days in the prior year period, based on the company’s reported accounts payable and cost of goods sold. Borders’s average payables on a TTM basis through October 31 amounted to USD 609m, down 10% from USD 679m in the year prior period.

“Borders Group has continued to pay its vendors and is not aware of any material disputes related to its December 2009 payments,” said a spokesperson to the company. The spokesperson declined to comment on whether vendors had approached management about a restructuring.

As of 31 October, the company had USD 215m available under its USD 1.125bn revolver, based on inventory and credit card receivables. According to the credit agreement backing the Bank of America-led loan due 2011, a 1.1x fixed charge ratio kicks in if the retailer’s borrowings exceed 90% of the maximum amount permitted. Borders would not currently be in compliance with the fixed charge ratio if it were tested, SEC filings show.

Too little too late

The beleaguered bookseller is struggling to adapt to technological change, cautious consumers, a revolving door in the executive suite and increased competition from big box retailers such a Wal-Mart, said Michael Norris, a trade book analyst at Simba Information.

Borders has lagged in adopting new publishing technologies, particularly electronic readers, as it struggles to ramp up foot traffic in its physical locations. In February, the bookseller will launch the Borders Alex-Reader, which will utilize the Google Android software. Border’s has also disclosed that it will launch an E-book website by June, in conjunction with Kobo, Inc.

Even if Borders sticks to that timetable, it already lost the first-mover advantage to competitor Barnes & Nobles in October when the largest national bookseller launched its Nook e-reader, itself an attempt to catch up with the well entrenched Kindle. “It’s not that Borders is doing anything wrong,” Norris said. “They have [just] done things kind of late.”

Battle of the e-readers aside, Border’s faces an even greater threat from loss of in-store shoppers to internet retailers, particularly Amazon, and was forced to shut its 200-store Waldenbooks chain last year. For 3Q09 ended 31 October, Border’s revenues were USD 602.5m versus USD 693m in the comparable period. Adjusted EBITDA was negative USD 34.2m versus a loss of USD 25.5m year-over-year.

The incursion of online sales continues unabated, judging by yesterday’s disappointing release of holiday sales from Borders. For the 11-week holiday period ended 16 January, consolidated sales swooned 13.7% year-over-year. Total sales for Borders superstores fell 14.7% to USD 649.2m while total sales for Waldenbooks slid 14.6% to USD 153.2m.

Borders’ soft numbers jibe with the broader trend in the bookselling industry. On 7 January, its rival Barnes & Nobles cut its forecasts for fiscal 3Q10 ending 30 January by 7%, citing weak holiday sales. For the nine-week holiday period that ended 2 January, sales at Barnes & Nobles stores declined 5% to USD 1.1bn, while same-store sales dropped 5.4%.

Borders’s shares dropped 9.82% to USD 1.23 today, down from highs in October around USD 3 but well above the USD 0.50 level the stock tested one year ago. The equity rallied mightily in April of last year after anchor shareholder Pershing Square extended the maturity of its USD 42.5m 9.8% loan to the company by one year to April 2010. But fear of lackluster holiday sales punished the shares in 4Q10.

Damage control

The paradigm shift in the traditional bookselling space has forced some publishers to re-adjust how they do business with the retailer. One major publisher has terminated its return policy with Borders to reduce risk, said a consultant to publishers. A seventh publisher canvassed by Debtwire said his firm has stopped shipping to Borders because of fears the retailer will send the books back unsold.

Publishers typically will advance books to traditional booksellers on consignment. In most cases, the bookseller can return the unsold books to the publisher and has no obligation to pay the publisher for the unsold inventory.

Suppliers in most industries can purchase factoring or credit insurance to protect themselves from welching customers but that’s no longer an option for book publishers. Factors and credit insurance providers no longer sell hedges on Barnes & Nobles or Borders because of high perceived default, said two trade insurance brokers, a credit insurance provider and two factors.

“Credit insurance, in general for the bricks and mortar business have dried up,” said the first broker. “Over the last 18 months, underwriters reached their capacity in retail. There is insurance for Amazon. But for vendors of Borders, it is scarce,” he added.

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