Reader's Digest parent in bankruptcy to implement restructuring deal

By Caroline Salls

Pittsburgh, Feb. 19 - RDA Holding Co., parent company of the Reader's Digest Association, Inc., filed Chapter 11 bankruptcy Sunday in the U.S. Bankruptcy Court for the Southern District of New York to implement a financial restructuring under an agreement reached with its secured lenders and more than 70% of its secured noteholders, according to a company news release.

RDA said the restructuring agreement is a key component of its comprehensive transformation plan. The bankruptcy case, which is limited to the company's U.S. business, is expected to conclude in less than six months.

Reader's Digest's international operations, including those in Canada, are not part of the filing.

Under the restructuring support agreement with the lenders and noteholders, the company will convert roughly $465 million of secured notes to equity, which RDA said will significantly deleverage its balance sheet.

The company said it expects to exit Chapter 11 with about $100 million of debt.

"After considering a wide range of alternatives, we believe this course of action will most effectively enable us to maintain our momentum in transforming the business and allow us to capitalize on the growing strength and presence of our outstanding brands and products," president and chief executive officer Robert E. Guth said in the release.

"The complex transformation that we began 18 months ago under the leadership of a new senior management team has resulted in a more streamlined, more focused, and more profitable business, but we have unfortunately been unable to align our debt levels correspondingly.

"The Chapter 11 process, which will facilitate a significant debt reduction, will enable us to continue to redefine our business by focusing our resources on our strong North America publishing brands, which have shown a new vitality as a result of our transformation efforts, particularly in the digital arena."

Previous filing

This is Reader's Digest's second bankruptcy in four years. As previously reported, the company emerged from its previous Chapter 11 case in February 2010 having reduced its debt by 75% and lowered its gross operating leverage to 3.2x from 17.5x.

RDA said the new Chapter 11 filing is not expected to impact its day-to-day operations. The company will continue to market and publish all of its U.S. and international publications during this process.

In addition, RDA said it continues to pursue agreements to sell and license international businesses and expects to finalize some agreements in the coming weeks.

Financing terms

In conjunction with the filing, a group of secured noteholders has agreed to provide RDA with up to $45 million in new financing to support its operations during this process as part of a $105 million facility that will repay in full its existing bank debt.

The new money financing is open to noteholders who agree to support the restructuring.

The proceeds of the new money loan will be used for working capital and other general corporate purposes, to pay transaction costs, fees and expenses incurred in connection with the DIP facility and to pay adequate protection expenses.

Proceeds of the refinancing loan will be used to repay in full the loans and obligations outstanding under the secured credit facilities, including rolling up existing letters of credit.

Interest on the new money loan will be either Base rate plus 850 basis points with a 150 bps floor or Libor plus 950 bps with a 150 bps Libor floor. Interest on the refinancing loan will be either Base rate plus 400 bps with a 300 bps floor or Libor plus 500 bps with a 300 bps Libor floor.

The facility will mature on the earliest of Oct. 31, 2013; the 40th day after entry of the interim order if the final order has not been entered; the effective date of a Chapter 11 plan of reorganization; and acceleration of the loans.

The company is seeking interim access to $11 million of the $45 million in new financing.

The loans will be continued as or converted into exit financing on the plan effective date, according to the DIP financing motion.

Debt details

According to court documents, RDA had $1,118,400,000 in assets and $1,184,500,000 in debt as of Dec. 31.

The company's largest unsecured creditors include:

• Indenture trustee Wells Fargo Bank, NA of New York, with a deficiency claim in a yet-to-be-determined amount;

• Administrative agent Luxor Capital Group, LP of New York, with a $10 million unsecured term loan claim;

• Federal Trade Commission, based in Washington, D.C., with an $8.75 million settlement claim;

• Williams Lea of New York, with a $5.97 million trade claim;

• HCL Technologies Ltd. of Vienna, Va., with a $4.37 million trade claim;

• Quad/Graphics Inc. of Sussex, Wis., with a $3.59 million trade claim; and

• RR Donnelley Receivables Inc. of Trumbull, Conn., with a $1.62 million trade claim.

Defaults triggered

According to an 8-K filed with the Securities and Exchange Commission, the bankruptcy filing constituted an event of default or otherwise triggered repayment obligations under Reader's Digest's credit and guarantee agreement with administrative agent Wells Fargo Bank, NA, the Luxor Capital unsecured loan and guarantee agreement and Reader's Digest's floating-rate senior secured notes due 2017.

The company said there is $49.8 million, in addition to $9.5 million in letters of credit, outstanding under the secured credit agreement, about $10 million outstanding under the unsecured credit agreement and roughly $464 million in principal amount of notes outstanding.

Acceleration of the debt is subject to the automatic stay imposed by the bankruptcy filing.

Missed payment

In addition, RDA said it did not make the Feb. 15 interest payment on the notes, subject to a 30-day grace period.

Also in the 8-K, RDA said director Ryan Schaper resigned from the board, effective Feb. 17.

The company is represented by Weil, Gotshal & Manges LLP.

Reader's Digest, a subsidiary of RDA Holding Co., is a media and direct marketing company based in New York. The Chapter 11 case number is 13-22233.

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