S&P puts Reader's Digest on negative watch

Standard & Poor's said it placed Reader's Digest Association Inc.'s BB corporate credit and BB- senior unsecured debt ratings on CreditWatch with negative implications following the company's reduced profitability, higher debt leverage and modestly negative discretionary cash flow in the fiscal year ended June 30. Also, the company has provided guidance of significantly higher operating losses in the seasonally weak fiscal first quarter ending Sept. 30.

EBITDA declined roughly 14% in fiscal 2006 as a $2.7 million operating loss in the company's consumer business services segment offset improving results of the core Reader's Digest worldwide magazine and direct-marketing book businesses. Lease-adjusted debt to EBITDA increased to about 3.7x in fiscal 2006 from 2.7x in fiscal 2005 because of weak operating performance and higher debt levels, the agency said.

The company currently has a modest margin of compliance against the $500 million revolving credit facility's maximum debt leverage of 3.5x, which increases to 3.75x on Sept. 30. S&P noted that a continued decline in operating performance would place further pressure on debt leverage and may restrict flexibility within bank covenants, which were amended in April.

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