Reader's Digest parent in Q3 covenant compliance after accord, has $111 million current cash

By Paul Deckelman

New York, Nov. 20 - RDA Holding Co. - the corporate parent of Reader's Digest Association, Inc., the publisher of the iconic magazine of the same name and numerous other magazine and book titles - is for now in compliance with its credit facility covenants following a recent agreement with lender Wells Fargo, company executives said Tuesday - although it remains in talks seeking further modifications.

RDA's chief financial officer, Paul Tomkins, said that the company currently has $111 million of cash and "we continue to carefully monitor our liquidity."

Compliance at quarter-end

Speaking to analysts and investors on the conference call following the New York-based publishing and direct marketing company's release of its results for the third quarter ended Sept. 30, Tomkins and the company's chief executive officer, Robert E. Guth, both noted as a major milestone that RDA had reached an agreement with Wells Fargo to modify the terms of its $50 million senior secured term loan due 2015 so the company would technically be in covenant compliance as of the quarter's end.

Under the terms of that agreement, which was announced on Nov. 9, the permitted total leverage ratio of debt versus trailing 12-month EBITDA was raised to 7.5 times from 6.25 times previously, while the first-out first lien leverage ratio was modified to 0.85 from 0.70 previously. At the same time, the cash interest coverage ratio was lowered to 1.2 times from 1.5 times previously.

The company will now pay a higher interest rate - Libor plus 6%, versus Libor plus 5% previously, with the rate in both cases subject to a 3% Libor floor.

After having reached agreement on those changes to cover the third quarter, Tomkins said on the conference call, "We also continue to have constructive discussions with Wells on a plan for the fourth quarter and beyond."

As of Sept. 30, the company had $534 million of total debt outstanding. The debt includes $464 million of floating-rate senior secured notes due 2017 remaining out of the $525 million that it had originally issued in 2010, the $50 million of secured term loan debt due 2015 under the facility it entered into in March of this year, nearly $10 million in outstanding letters of credit also issued under that March facility, and another $10 million in unsecured term loan debt due 2014 it had entered into in 2011.

In its third-quarter 10-Q filing with the Securities and Exchange Commission, RDA said that "based on current projections and given the impact of continued business declines and transformation activities currently underway, our operating results will not be sufficient to satisfy the financial covenants in the 2012 secured credit facility for the next several quarters."

Accordingly, the company reclassified the 2012 secured credit facility and the 2011 unsecured term loan from non-current to current in its consolidated balance sheet, as of Sept. 30, due to certain cross-default provisions. However, it continues to classify the floating-rate notes as non-current, "as there is no expectation of a cross-default because the 2012 secured term loan was not accelerated by the lender."

Debt down - but leverage up

As of Sept. 30, RDA's balance sheet showed $88 million of cash and equivalents, for total net debt of $446 million. That was up from net debt of $420 million at the end of the second quarter on June 30, but down from $515 million of net debt as of the end of last year's fourth quarter on Dec. 31, 2011 - $627 million of total debt less $112 million of cash and equivalents.

However, despite the reduction in both total debt and net debt from nearly a year ago - helped along, for instance, by RDA's repurchase in May of nearly $61 million of the floating-rate notes using proceeds from the company's sale of its Allrecipes.com business - its leverage ratios showed a sharp deterioration from year-end 2011, hurt by the company's ongoing operational troubles, which resulted in lower overall earnings and EBITDA.

The latter income measure, for instance, fell to $74 million for the third quarter from $121 million in the 2011 fourth quarter, causing the ratio of total debt versus EBITDA to rise to 7.2 times from 5.2 times.

The ratio of net debt versus EBITDA rose to 6 times from 4.3 times, while the company's ratio of EBITDA versus cash interest costs fell to 1.4 times from 2.3 times, even though quarterly interest expense remained relatively steady at a little over $50 million. The third-quarter ratios are within the amended terms of the credit facility agreement.

Company cuts restricted cash

Tomkins said that after having made a scheduled coupon payment on the floating-rate notes last week, the company's cash position currently stands at $111 million, including restricted cash and reserved cash. He told an analyst during the question-and-answer period that restricted cash included that being held as prizes for sweepstakes promotions that the company runs, mostly outside the United States, as well as collateral tied up with corporate credit-card processing and deposits. Certain letters of credit outside the U.S. are cash-collateralized as well. He said that RDA "continued to make strides" in reducing its balances of restricted and reserved cash outside the United States.

Tomkins further said that RDA had activated its letter-of-credit facility with Wells Fargo, "and [we] have now brought back the majority of the operating cash - formerly considered restricted - that was being used to collateralize the LC.'s" - $11 million out of $15 million.

Strategic efforts continue

During the call, Guth declined to comment specifically on the company's strategic transaction moves - its efforts to shed unprofitable brands and otherwise monetize assets that don't fit in with its long-term transformation plan, which he said would involve "stripping the business down to its strong core" by further asset divestitures such as last year's sale of the well-known, but ultimately non-strategic Every Day With Rachel Ray cooking and entertaining publication "and building up from there."

For the quarter ended Sept. 30, revenue decreased by $82.3 million to $230.1 million, a decline of 26.3% from the 2011 quarter.

The revenue declines were primarily due to a lower active customer base on RDA's books and home entertainment products and a reduction in promotional investment across many of its markets in Europe and Asia. The revenue declines were also due to lower sales on some of its book product lines in North America, the sale of Every Day with Rachael Ray in October 2011 and declining subscription renewals on some RDA magazine titles.

The third-quarter operating loss was $100.1 million, reflecting an impairment charge of $85 million. Excluding impairment charges in both comparable periods, operating loss decreased by $25.9 million to $15.1 million, a decrease of 63.2% from the 2011 quarter. The decrease in operating loss was primarily the result of the sale of Rachael Ray, as well as a reduction in promotional investments and overhead cost savings related to the company's 2011 restructuring initiatives.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.