Moody's downgrades Reader's Digest, rates Doctor loans Ba3, note B3

Moody's Investors Service said it downgraded The Reader's Digest Association, Inc.'s corporate family and probability-of-default ratings to B2 from Ba1.

The agency also assigned B2 corporate family and probability-of-default ratings to Doctor Acquisition Co., Ba3 ratings with loss-given-default assessments of LGD2 (28%) to the company's $1.46 billion guaranteed senior secured credit facilities - which include a revolving credit facility and a term loan B - and a B3 (LGD5, 76%) rating to its $750 million guaranteed senior subordinated notes.

The outlook for both companies is stable.

This concludes the review of Reader's Digest begun on Sept. 6 in connection with the proposed $2.4 billion acquisition of the company by a consortium of investors led by Ripplewood Holdings LLC. Doctor Acquisition is an acquisition vehicle owned by Ripplewood and affiliates that will be merged into Reader's Digest with Reader's Digest continuing as the survivor and borrower.

The agency said the downgrade reflects the significant increase in leverage that will occur as a result of the debt-financed buyout and the company's concurrent combination with Ripplewood portfolio companies WRC Media Inc. and Direct Holdings U.S. Corp. Moody's estimated that the debt-to-EBITDA ratio will remain high at between 7.2x and 7.4x in 2008 and that debt reduction will initially be modest due to the higher interest burden and spending associated with restructuring actions.

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