Reader's Digest makes pre-packaged Chapter 11 bankruptcy filing

By Caroline Salls

Pittsburgh, Aug. 24 - The Reader's Digest Association, Inc. made a pre-packaged Chapter 11 bankruptcy filing Monday in the U.S. Bankruptcy Court for the Southern District of New York as part of its previously announced restructuring plan, according to a company news release.

Before the bankruptcy filing, more than 80% of the company's senior secured lenders had signed on to the agreement in principle.

"Our business operations remain solid, with anticipated fiscal 2009 revenue only down by low single digits, currency neutral, despite the recession," president and chief executive officer Mary Berner said in the release.

"We look forward to emerging with a restructured balance sheet and as a financially stronger organization that is positioned to pursue our growth and transformational initiatives."

Financing terms

Reader's Digest said its senior lender group has committed $150 million in new debtor-in-possession financing, which is convertible into a three-year exit facility upon emergence to give the company enough liquidity during the reorganization process and beyond.

JPMorgan Chase Bank, NA is the administrative agent, and J.P. Morgan Securities Inc. is the sole lead arranger.

The DIP loan has a term of nine months with one three-month extension option.

Pricing on the DIP loan is Libor plus 1,000 basis points with a 3.5% Libor floor. If the extension option is exercised, pricing will move to Libor plus 1,100 bps. There is also a 200 bps unused commitment fee.

Exit fees include 100 bps on the amount repaid, and 300 bps on the amount continued as or converted into the exit facility.

The company is seeking interim access to $100 million of the DIP financing.

As previously reported, the company's exit financing will also include an up to $100 million first-priority German term loan and an up to $300 million second-priority U.S. term loan.

The first-priority German loan will mature on March 2, 2014, and the second-priority loan will mature no earlier than the first-priority loans.

Interest on the German loan will be Libor plus 550 bps cash and 450 bps paid in kind, with a 350 bps Libor floor, and interest on the second-priority loan will be Libor plus 550 bps cash and 650 bps PIK, with a 350 bps Libor floor.

Under the restructuring agreement, Reader's Digest's senior lenders would exchange a substantial portion of the company's $1.6 billion in senior secured debt for equity, effectively transferring ownership to the lender group.

The agreement also establishes the terms of the $550 million in debt that will remain on the company's balance sheet upon exit, reduced from roughly $2.2 billion.

Creditor treatment

Treatment of creditors under Reader's Digest's restructuring plan will include:

• Holders of administrative and priority claims will be paid in full in cash;

• Holders of other secured claims will be paid in full either in cash or through the return of the collateral securing the claim;

• DIP facility claims will be converted into a $150 million first-lien term loan;

• Holders of senior secured lender claims will receive a $300 million second-lien term loan, an amended and extended euro term loan and substantially all of the equity in the reorganized company, subject to management dilution. In addition, the company's letter-of-credit subfacility will be replaced with new collateralized letters of credit;

• Holders of senior subordinated notes will receive no distribution, but they will receive a $50 million to $100 million equity buy-in feature, not to exceed 10% to 20% of new ownership;

• Ongoing trade vendors will be paid in the ordinary course; and

• Holders of existing equity will receive no distribution.

Reader's Digest said the treatment of general unsecured claims is yet to be determined.

According to court documents, the company has more than $1 billion in both assets and debt.

The company said it has requested court approval of a variety of first-day motions and is seeking to honor its customer obligations.

Reader's Digest said the Chapter 11 filing applies only to its U.S. businesses, and its operations in Canada, Latin America, Europe, Africa, Asia and Australia-New Zealand will not be affected.

Reader's Digest is a Pleasantville, N.Y., publishing company. Its Chapter 11 case number is 09-23529.

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