Earlier this week, Reader’s Digest Association, Inc. (RDA) announced that it will seek bankruptcy restructuring under a voluntary pre-arranged Chapter 11. RDA is of course best known as the publisher of Reader’s Digest, the world’s largest circulated magazine. Despite the global recession and the announcement, the company says that operationally it remains strong and that revenue declines for this year are expected be in the “low single digits.”
RDA will be aided considerably in the restructuring process by reaching in principle a debt-for-equity agreement with a vast majority of its senior secured lenders which will reduce its debt burden 75% from $2.2 billion to $550 million. So far, senior lenders representing 80% of the dollar value of outstanding bank debt and 70% of investing institutions have agreed to the deal. A bankruptcy filing would bind the remaining lenders.
“This agreement in principle with our lenders follows months of intensive strategic review of our balance sheet issues to financially strengthen the company,” said Mary Berner, president and CEO, RDA. She touted, “The company has strong brands and products, a leadership position in many markets around the world and a solid plan for the future. Restructuring our debt will enable us to have the financial flexibility to move ahead with our growth and transformational initiatives.”
Pre-packaged Chapter 11s have emerged as a symptom of the current bankruptcy system. The recent case of Source Interlink was a prime example of the success pre-arranged plans can have, as the company filed and emerged from bankruptcy in a little over 30 days by reaching agreements with lenders. On the other side is Charter Communications, which filed for bankruptcy in April with what it thought was a pre-arranged plan, only to be met with objections from lenders and the company was filing amended plans in court at the end of July.
Berner heaped gratitude upon RDA’s senior secured lenders for being willing to exchange a substantial percentage of the $1.6 billion in senior secured debt for equity that transfers the ownership of the company to the senior lender group. This means that Ripplewood Holdings LLC, which purchased RDA for $2.8 billion in 2007 and has been trying to control costs ever since, will relinquish its stake in the company. All members of the Board of Directors that have served since the 2007 acquisition have resigned, with the exception of Berner, who will be compensated $125,000 per month as long as she is employed with RDA during the restructuring process and will receive a $2.2 million severance package if not offered employment upon the company’s exit from bankruptcy. The agreement with the senior secured lenders also includes a commitment from members, led by JP Morgan, to provide $150 million in new money Debtor-in-Possession (DIP) financing, which the company believes will provide sufficient liquidity and the necessary capital to emerge from bankruptcy. There is also the establishment of substantive terms for the $550 million in debt that will stay on the company’s balance sheet. RDA’s pro form capital structure will include the $150 million exit facility; $300 million in a second priority U.S. term loan and approximately another $100 million (USD) in a current Euro Term Loan, both part of the senior secured lenders agreement; and a single class of common stock.
RDA’s international operations will not be affected by the Chapter 11 process based on their continuing operations and access to DIP financing.
In conjunction with the bankruptcy announcement, RDA said that it will be electing not to make a $27 million interest payment due earlier this week on its 9% Senior Subordinated Notes due 2017. Instead, as it secures the best path to move forward, the company will utilize a 30-day grace period available to it as discussions are ongoing with the lender group and stakeholders in the push for a consensual de-leveraging transaction. RDA stresses that choosing not to make the payment does not constitute default, which would allow for the acceleration of the Senior Subordinated Notes or any other debt.
A person familiar with the case said that the key obstacle that remains for RDA is negotiating with the lenders of its junior subordinated debt. If the company has any hope of succeeding with a pre-packaged Chapter 11, it needs two-thirds of the dollar amount and half the number of the lending group to agree to a plan and the offer made to these lenders has been mainly a buy-in.
The court filing of the company’s Chapter 11 plan is expected to take place within the next 30 days, before the grace period ends.
Reader’s Digest, like the majority of print media outlets, has taken a beating from declining advertising dollars and a shrinking readership base. Earlier this year, the magazine lowered the number of issues released per year from 12 to 10, and lowered its circulation guarantee with advertisers from 8 million to 5.5 million. In its 10-Q filings with the Securities and Exchange Commission (SEC) for the second quarter, RDA reported revenues were down from $575 million in the first three months of 2008 to $479 million in 2009, with operating losses of $535.9 million and net losses for the nine months ending March 31st 2009 of $652.6 million. The company also reduced the value of its trademark on the name Reader’s Digest from $621 million in 2008 to $288.7 million this year.
RDA continues to calm vendors that business will continue as usual and that the majority of vendors and suppliers will be unaffected. “The company is not going out of business anywhere around the world,” wrote Albert Perruzza, senior vice president, RDA Global Operations, in a letter to the company’s vendors.
Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National