Reader’s Digest Association, Inc. (RDA) filed today for bankruptcy restructuring under a voluntary pre-arranged Chapter 11. RDA is 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 announced that it has filed a number of motions to ensure that the filing does not adversely affect day-to-day operations for its employees, customers or suppliers. The company is seeking - and fully expects to receive - approval for a variety of first-day motions, including requests to honor its customer obligations. Suppliers and vendors who provide goods and services to the company on or after August 24, 2009, will continue to be paid in the ordinary course.
RDA will be aided considerably in the restructuring process by reaching in principle a debt-for-equity agreement last week with a vast majority of its senior secured lenders which will reduce its debt burden 75% from $2.2 billion to $550 million. Senior lenders representing 80% of the dollar value of outstanding bank debt and 70% of investing institutions agreed to the deal. The bankruptcy filing will bind the remaining lenders.
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.
Mary Berner, president and CEO, RDA, has heaped gratitude upon the company’s senior secured lenders for taking the exchange of 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. The agreement with the senior secured lenders also established $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 filing.
In conjunction with the bankruptcy announcement last week, RDA chose not to make a $27 million interest payment on its 9% Senior Subordinated Notes due 2017. Instead, the company is utilizing 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 stressed 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 $600 million in 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.
Berner said today, “We look forward to emerging with a restructured balance sheet and as a financially stronger organization that is positioned to pursue our growth and transformational initiatives.”
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.
Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National