Just days after reporting dismal holiday earnings, Borders (BGP) can't quite shake off the negative news vibe. According to Debtwire, the company has been "playing a risky game of favorites" by paying only some of the publishers it does business with -- and the ones losing out are in the process of taking legal action.Borders' long-documented money-losing, credit-extending and cashflow problems means that the company is trying to hold on to as much money as it can, and one way it appears it has done so is to make sure its biggest clients are paid first while smaller publishers must wait their turn. Three major publishers told Debtwire they were paid on time for the December period but three smaller firms said the company has been delaying payments.

The numbers bear this out: Average payment time for the twelve-month period ending last October 31 was 97.9 days, up 40% from the 69.4 day average of a year ago. (Borders did not return requests for comment, but did tell Debtwire, "Borders Group has continued to pay its vendors and is not aware of any material disputes related to its December 2009 payments.")

With increased delays, and inquiries into whether Borders would come up with a restructuring plan to speed up outstanding payments rebuffed, a group of these smaller publishers have retained the bankruptcy firm Lowenstein Sandler as legal counsel. It's the same firm that prepared a financial analysis of Borders last December which pinpointed the bulk of the company's problems -- declining revenue and profit margins, a short-term liquidity crunch, a highly leveraged capital structure, and a challenging operating environment. With $674.2 million of short-term obligations, the report noted, "Borders is likely to face a short-term liquidity crunch if it is not able to refinance its debt or generate sufficient cash from operations."

As of last October, Borders has $215 million available in credit from a Bank of America-backed loan that expires in July 2011, and another $42.5 million loaned to them (at a 9.8% interest rate) by its leading shareholder Pershing Square Capital Management, which, after several extensions, finally comes due on April 1. If the company doesn't get its act together by the summer -- i.e. its borrowings exceed 90% of the maximum amount permitted -- a 1.1x fixed charge ratio kicks in, which at the moment Borders would not be able to comply with.

It's another example of the clock ticking on Borders, which must come up with something drastic and unexpected to keep the company afloat a little while longer.

UPDATE: Lowenstein Sandler had not responded to DailyFinance's request for comment, but a representative told Publishers Weekly that it has not been retained by any group.

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