Reader's Digest Plans To Restructure Debt Through Ch. 11

Reader's Digest Association announced a plan today to restructure its $2.2 billion in debt through a pre-packaged Chapter 11 filing. The company said it had reached an agreement with a majority of its lenders, which include JP Morgan, Ares Capital and GE Capital, that would reduce its debt to $550 million. RDA plans to file for Chapter 11 bankruptcy protection within the next 30 days, using the 30-day grace period to put avoid making a $27 million interest payment on senior subordinated debt due today. Company spokesman William Adler said the Reader's Digest publisher would be using the next few days to get more lenders on board with the plan, although a majority have already agreed to it in principle. Once the debt is decreased, Adler said he had faith that the company would be able to turn a profit and grow. "The business generates a lot of cash, just not enough to pay off our debt," Adler said, revealing that RDA brings in $130 million in cash per year but has $145 million in debt. "We want to bring our debt to a level that we could comfortably cover." In a statement, CEO Mary Berner said the company will continue to operate as normal throughout the restructuring process. "Restructuring our debt will enable us to have the financial flexibility to move ahead with our growth and transformational initiatives," she said. RDA's full release after the jump READER'S DIGEST ASSOCIATION REACHES AGREEMENT IN PRINCIPLE WITH LENDERS TO SIGNIFICANTLY REDUCE ITS DEBT FROM $2.2 BILLION TO $550 MILLION; Debt-for-Equity Restructuring Plan is Supported by a Majority of Secured Lenders; RDA to Use 30-day 'Grace Period' on $27 Million Notes Payment to Seek Consensus with Additional Lenders and Stakeholders; RDA Expects to Implement through Pre-Arranged Chapter 11 Process, Obtains Commitment for $150 Million New Money DIP Financing Facility Convertible to Exit Financing upon Emergence; RDA's Non-U.S. Operations Will Not be Part of the Filing; Company Expects Vast Majority of Vendors to Recover in Full; RDA's Operations Remain Strong, Expects Solid FY09 Revenue Performance PLEASANTVILLE, N.Y., August 17, 2009 -- The Reader's Digest Association, Inc. (RDA), a global multi-brand media and marketing company, today announced it has reached an agreement in principle with a majority of its senior secured lenders on the terms of a restructuring plan to significantly reduce its debt burden and strengthen the company financially for the future. The restructuring agreement provides that the company's senior secured lenders will exchange a substantial portion of the company's $1.6 billion in senior secured debt for equity and provides for a transfer of ownership of the company to the lender group. The company has elected not to make a $27 million interest payment due today on its 9 percent Senior Subordinated Notes due 2017. Instead, the company is using the 30-day grace period available on the interest payment to continue discussions with its lender group and other stakeholders regarding the terms of final documentation and to gain additional support for the consensual de-leveraging transaction. Use of the 30-day grace period does not constitute a default that permits acceleration of the Senior Subordinated Notes or any other indebtedness. In addition, RDA continues to be in compliance with its financial covenants. The companyâ€™s business operations remain strong, with anticipated Fiscal 2009 revenue declines (not yet reported) in the low single digits, currency neutral, despite the global recession. As part of the agreement in principle, RDA anticipates implementing the restructuring under court supervision through a voluntary pre-arranged filing under Chapter 11 of the United States Bankruptcy Code, which it expects to complete on an expedited basis while operating business as usual. During the 30-day grace period, the company will seek further consensus among its lenders and other stakeholders in advance of such a filing to facilitate the completion of RDAâ€™s restructuring objectives. The agreement in principle includes a commitment from certain members of the senior lender group to provide $150 million in new money Debtor-in-Possession (DIP) financing, convertible into exit financing upon emergence, which the company expects will ensure sufficient liquidity during the reorganization process and beyond. In addition to providing RDA with the necessary capital to emerge from Chapter 11, the arrangement also establishes the substantive terms of the $550 million in debt that will remain on RDA's balance sheet upon emergence, a 75 percent reduction from the current $2.2 billion in debt. As a result of the agreement reached with a majority of the senior lenders, the company expects that, subject to court approval, the vast majority of its suppliers and vendors will recover in full under a Chapter 11 plan. The Chapter 11 filing will apply only to the company's U.S. businesses -- its operations in Canada, Latin America, Europe, Africa, Asia and Australia -- New Zealand will not be affected. RDA's International operations are expected to have adequate funding based on continuing operations and access to proceeds from the DIP financing. Mary Berner, RDA's President and Chief Executive Officer, said the company will continue to operate normally throughout the restructuring process. "This agreement in principle with our lenders follows months of intensive strategic review of our balance-sheet issues to financially strengthen the company," she said. "We are gratified to have this support from our secured lender group. 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." "We also thank our sponsor Ripplewood Holdings, who has provided inspired vision and stewardship over the last two and a half years, including during this process," added Berner. In March 2007, Ripplewood led a consortium of investors in a transaction that resulted in the company's acquisition. All of the members of the company's Board of Directors who have served since the March 2007 acquisition, with the exception of Berner, have resigned from the companyâ€™s Board. The two recently appointed directors also continue to serve on the Board. The company and the lenders recognize that the Board has chosen to support a consensual and expedited process towards reorganization that seeks to maximize creditor recoveries. Further information about the company can be found at www.rda.com. Additional details about the company's debt instruments are available in its annual report on Form 10-K for the year ended June 30, 2008, filed with the Securities and Exchange Commission.

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Reader's Digest Plans To Restructure Debt Through Ch. 11

Amanda Ernst

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