Reader's Digest plans to file bankruptcy, debt mixed; CIT completes tender, bonds unfazed

By Stephanie N. Rotondo and Sara Rosenberg

Portland, Ore., Aug. 17 - Summer was the big topic among distressed debt market players Monday - or, at least, what summer's impact was on the trading markets.

"Summer is in full swing," said one trader, who was back from vacation just so everyone else in his office could take their leave.

"We are hugely under a billion in turnover," said one trader, who opined that about $800 million in total debt traded between the high-yield and distressed worlds. "That's like a Saturday. It was really a sleeper."

Even news, like word that Reader's Digest Association Inc. was planning a pre-packaged bankruptcy, did little to stir things up. Reader's Digest bank debt moved around some, but its bonds were nearly radio silent.

So was the case in CIT Group Inc. The company announced it had successfully completed a tender offer for its floating-rate notes that were to have come due Monday. But as that was the name's most active issue, traders saw little else going on under the CIT umbrella.

What was moving was Energy Future Holdings Corp., also known as TXU Corp. With no news to explain it, traders reported the company's debt had moved down from recent highs in somewhat active trading.

Reader's Digest to file, debt mixed

The Reader's Digest Association's term loan B was all over the place during the trading session as the company announced that it expects to file for Chapter 11 as part of a restructuring agreement that it is working on with lenders, according to traders.

One trader had the term loan B quoted at 36 bid, 37½ offered, compared to 36½ bid, 38 offered on Friday. This trader said that the highest bid on Monday was 38, whereas the highest bid on Friday was 40.

A second trader had the loan quoted at 35 bid, 37 offered, compared to 37 bid, 37½ offered on Friday. The trader remarked that the paper was as good as 38 bid, 40 offered on Monday morning but then it came in as the day progressed.

And, a third trader had the loan quoted at 36½ bid, 38½ offered, up from 33½ bid, 35½ offered on Friday afternoon.

The company's bonds, however, were not as active as its bank debt counterpart, traders reported.

One trader said the 9% notes due 2017 last traded at 6 on Aug. 11. The name had been a topic around his office during the session, he remarked.

"We were wondering if this was the first time they filed for bankruptcy, or the second time," he said.

On Monday morning, Reader's Digest announced that it 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 it financially.

And, the company will seek further consensus among its lenders and other stakeholders prior to filing for bankruptcy.

Under the planned restructuring, lenders will exchange a substantial portion of Reader's Digest's $1.6 billion in senior secured debt for equity and ownership of the company will be transferred to the lender group.

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 financing.

The DIP loan will be convertible into exit financing upon the company's emergence from bankruptcy.

The arrangement also establishes the substantive terms of the $550 million in debt that will remain on the company's balance sheet upon emergence, a 75% reduction from the current $2.2 billion in debt.

Reader's Digest has decided not to make a $27 million interest payment due on Monday on its 9% 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 deleveraging transaction.

"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 chief executive officer, in a news release.

"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," Berner added.

Following the news, Moody's Investors Service dropped its rating on the company to Ca from Caa3. The outlook is negative.

Standard & Poor's also downgraded the company, giving Reader's Digest a new grade of D, down from CCC.

Reader's Digest is a Pleasantville, N.Y.-based media and marketing company.

CIT bonds unfazed

Also in the news, CIT Group provided an update regarding its tender offer that expired late Friday. But the news did little to spark enthusiasm in the company's other non-tendered notes.

"Very little traded," said one trader, who noted that of the $1 billion in floating-rate notes that were to have matured Monday, 59.81% were validly tendered and the rest were apparently paid out. As the floater was the company's most active issue, there was little left to intrigue investors.

"All those short inter-notes dried up," the trader said.

Another trader agreed there was "not much going on in CIT."

At another desk, a trader quoted the 6¼% notes due 2010 at 57 bid, 58 offered and the 6% notes due 2036 at 53 bid, 54 offered, both about unchanged.

Another trader said that CIT's bonds "did not seem terribly active." He said that among its short-dated issues, the 4 1/8% notes coming due on Nov. 1 were at 72 bid, 74 offered, "pretty unchanged" on the day, on "not much activity." He also saw "no activity" in the company's 7 5/8% notes due 2012, leaving them unchanged around the 58 mark.

Still, even as some headlines had CIT "dodging" a possible bankruptcy filing, not all market players agreed that Chapter 11 was no longer conceivable.

For one, Fitch Ratings slashed CIT's issuer default rating to RD from C.

"Despite completion of the offer, Fitch believes CIT's liquidity issues remain acute with bankruptcy still a potential outcome," the agency said in a press release. "Fitch also believes that, as part of the company's broader recapitalization plan, additional [coercive debt exchanges] are forthcoming."

S&P also joined in, cutting CIT to SD from CC.

TXU losing recent gains

Traders reported seeing Energy Future Holdings' debt - also known as TXU Corp. - falling from recent highs, though there was no news to explain the declines.

A trader said the 10¼% notes due 2015 - "a giant issue," he noted - had moved up "in recent weeks" to highs around 80. But early Monday, he saw a market at 65 bid, 70 offered. The notes later "settled in" at 66½ bid, 67½ offered.

"Obviously that's coming down from the 80 level pretty quickly," he said.

Another trader said the issue was "all over the place," pegging the bonds at 67 bid, 68 offered. He called that "down some," versus levels around 75 just last week.

Earlier in the month, TXU reported a net loss of $155 million for the second quarter ended June 30.

Broad market in holding pattern

Among other distressed names, Harrah's Entertainment Inc.'s 10% notes due 2018 ended at 68 bid, 70 offered, according to a trader.

Another trader saw $15 million of General Growth Properties Inc.'s 7.2% notes due 2012 trading around 76.5.

SLM Corp. - better known as Sallie Mae - saw its 5 5/8% notes due 2033 trade at 52, with $15 million changing hands.

A trader said that Ply Gem Industries Inc.'s bonds - which had shot up smartly on Friday - were so inactive on Monday that "I don't even recall seeing a quote" on them. The 11¾% senior notes due 2013 had one trade at 84, "about where they were" on Friday, while "there was some activity" in its 9% subordinated notes due 2012, which traded up to 39 bid, "up a little higher than where they were" on Friday. But activity in the credit, he said, was "not robust, just a couple of trades."

Realogy Corp.'s notes "look unchanged, maybe quoted a little lower, but with no activity," a trader said, with the 10½% notes due 2014 at 53 bid, 55 offered.

Paul Deckelman contributed to this article.

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