Updated: RDA Readies Bankruptcy Filing

Five months ago, Reader’s Digest Association sought restructuring advice from Kirkland & Ellis, a law firm known for its bankruptcy practice, kicking off a flurry of press coverage and forcing president and CEO Mary Berner to deny RDA was filing for bankruptcy.

Today, its turnaround plans hampered by the recession, said it planned to do just that, as part of what it called a pre-arranged filing designed to let it exit from bankruptcy quickly.
The publisher of the eponymous pocket-sized magazine and Every Day with Rachael Ray said it reached an agreement in principle with new lenders to cut its debt to $550 million from $2.2 billion in a debt-for-equity deal. More than seven lenders, including JP Morgan Chase, GE Capital and Bank of America, would get ownership of the company in exchange for a $150 million influx of new financing. The bankruptcy filing applies to RDA’s U.S. businesses only.

For a company heading toward bankruptcy, a pre-packaged filing is a way to reduce the uncertainty of the filing process. Trade publisher Cygnus Business Media filed a pre-packaged bankruptcy earlier this month as part of a debt reduction plan.

Mike Simonton, a debt analyst with Fitch Ratings, said RDA could still run into complications. “There’s always uncertainty as a company enters the Chapter 11 process—from other parties that disagree with the plan [to] the possibility that the judge doesn’t accept the plan,” he said. “If those lenders are truly on board with the plan, it appears it could be a quicker trip through the court process.”

Berner said she anticipated the company emerging from bankruptcy within 45-90 days after filing. “It’s business as usual,” she said.

RDA went private in 2007 when an investor group led by Ripplewood Holdings bought it for $2.4 billion including debt. Led by ex-Glamour publisher and Fairchild Publications boss Berner, the company made a series of big-name hires and looked for growth by packaging its existing magazines and related properties and launching new publications.
Earlier this year, though, facing lower revenues, RDA cut 8 percent of its 3,500-person worldwide staff. It later announced it would cut the rate base of its flagship Reader’s Digest to 5.5 million from 8 million and reduce its frequency to 10 from 12 issues.

Berner said that while revenue declined only 1.4 percent in the fiscal year that ended June 30. Indeed, this year through its September issue, the flagship has fared relatively well, its ad pages down 7.7 percent versus a 23.4 percent decline for the magazine industry overall, per the Mediaweek Monitor. Still, the company has suffered from its big debt load and poor performance of its Books are Fun and QSP divisions, which have since been sold.

“When the company was structured, it was two and a half years ago, we had two other revenue-producing businesses, and those turned out to be albatrosses for us,” Berner said. “They were in more precipitous decline than we thought.”

RDA was due today to make a $27 million interest payment on its debt. Instead, the company said it decided to use a 30-day grace period to shore up more financing and that it remained in compliance with its lenders.
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