Moody's may downgrade Reader's Digest

Moody's Investors Service said it expanded the scope of its review for downgrade of The Reader's Digest Association, Inc. following the company's announcement that Ripplewood Holdings LLC will take the company private for approximately $2.4 billion.

The agency originally placed Reader's Digest's Ba1 corporate family and probability-of-default ratings and Ba2 senior unsecured notes (LGD5, 82%) on review for downgrade on Sept. 6 following increasing debt to fund acquisitions and return of capital to shareholders, deterioration in cash generation and Moody's concern regarding the company's weakened liquidity position.

Moody's said it will evaluate Ripplewood's proposed financing structure, including the amount of any equity contribution, strategies to grow revenues and enhance operating margins and plans for asset sales, but believes the cash purchase price will likely result in a significant increase in leverage and a multi-notch downgrade of the corporate family rating.

Reader's Digest's existing $300 million notes indenture has a change-of-control provision that allows bondholders to put the notes back to the company at 101% of par. The agency expects the notes and the existing $500 million credit agreement will be retired if the acquisition closes.

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