Would Borders Benefit From Chapter 11 Bankruptcy?

February 22nd, 2010 by Reed Allmand

Rumors are swirling that Borders Bookstore may need to file for Chapter 11 bankruptcy or even a Chapter 7 bankruptcy if it is not able to make significant changes to its business model that will allow it to compete with electronic rivals.  Of course, Borders has vehemently denied speculations that it will need to seek protection from creditors under Chapter 11 bankruptcy.  But it is Borders’ outstanding senior secured loan of $42.5 million which is due April 1, 2010 that is spurred the bankruptcy rumors.  Currently, Borders is struggling to turn a significant profit and even had to lay off 124 corporate employees, which is about 10 percent of its corporate staff.  But if Borders did file Chapter 11 bankruptcy, how might the company benefit?

1. Under Chapter 11 bankruptcy Borders may be able to nearly wipe out debt obligations to junior creditors freeing up more income that can be used for expansion or business improvements.
2. Under Chapter 11 bankruptcy Borders would have extraordinary leverage in negotiating a reduction of debt owed to senior creditors.
3. Under Chapter 11 bankruptcy, investors may be willing to issue a debtor-in-possession loan if the company had a viable bankruptcy plan.
4. Borders would have an extraordinary advantage over even online rivals due to reduced debt obligations once it emerges from Chapter11 bankruptcy.
5. Under Chapter 11 bankruptcy, Borders might be able to end or significantly alter unprofitable contracts and agreements with vendors, employees, investors and even retirees.

Chapter 11 bankruptcy would also give the company the time it needs to rethink their business model because creditors would not be able to pursue them while they are in bankruptcy. This one fact alone might make Chapter 11 bankruptcy a smart decision for Borders.