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S&P puts Reader's Digest on watch
Standard & Poor's put Reader's Digest Association Inc. on CreditWatch negative including its $192.5 million revolving credit facility due 2006, $250 million tranche A term loan due 2007 and $700 million tranche B term loan due 2008 at BB+.
S&P said the CreditWatch listing follows Reader's Digest's earnings drop in the fiscal third quarter ended March 31, 2003, versus the prior year period, weak operating outlook for the fiscal fourth quarter, increased business risk, and the need to get a bank amendment to provide sufficient cushion with its debt leverage covenant.
EBITDA (prior to a $16 million cash restructuring charge) declined 4% in the three months ended March 31, 2003, because the contribution from the May 2002 acquisition of Reiman Publications acquisition did not offset a sharp decline in international profitability, S&P noted. EBITDA of international businesses fell roughly 75% in the three months ended March 31, 2003, due to weakness in the company's core book business resulting from lower response rates.
The company is implementing an operational restructuring with the goal of reducing costs by $70 million in the next two years. However, Reader's Digest still expects weaker results in the fourth quarter of fiscal 2003, as the drop in international promotional activities will not be fully offset by cost reductions, S&P said.
Debt to EBITDA increased slightly to 3.65x at March 31, 2003, from 3.32x at the fiscal year ended June 30, 2002, as weak profitability was partially offset by debt reduction, S&P said. The company plans to repay about $50 million in debt during the fourth quarter with free cash flow. Even so, the company faces a step-down in the debt to EBITDA covenant to 3.25x as of June 30, 2003, from 3.75x as of March 31, 2003.
Reader's Digest has initiated discussions with its bankers to amend the leverage covenant. The company expects to resolve this matter during the fourth quarter.
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