Reader's Digest to file for Chapter 11 to reduce debt

Reader’s Digest Association Inc, the publisher of the pocket-sized magazine, will likely file a Chapter 11 bankruptcy under an agreement with a majority of its secured lenders to reduce debt by 75 per cent.

Senior secured lenders will exchange a “substantial portion” of $1.6 billion in debt for equity, the publisher said today in a statement. Some of them will provide a $150 million bankruptcy loan, debtor-in-possession financing, to ensure the company has enough liquidity during its reorganisation.

The publisher was bought in March 2007 by an investor group led by Ripplewood Holdings LLC that saddled it with debt just before the advertising market slumped. Ad sales at the magazine, which claims the world’s largest readership, slipped 7.2 per cent to $121.2 million in the first half from a year earlier, according to Publishers Information Bureau data.

“It was a fairly stretched deal to begin with — it relied pretty heavily on cost savings — but certainly the economic environment that they hit did not help,” said John Puchalla, a credit analyst at Moody’s Investors Service in New York. “Every time they’ve realised savings, it was being eaten up by the business environment.”

Reader’s Digest, based in Pleasantville, New York, said that the so-called pre-packaged bankruptcy wouldn’t apply to operations outside the US and the agreement with lenders will cut debt to $550 million from $2.2 billion. It said it continues to be in compliance with its financial covenants.

“Because this is a pre-arranged deal, it’ll be business as usual,” Chief Executive Officer Mary Berner in an interview. “There’s no anticipated layoffs, no anticipated business closings, no anticipated effect on our employees, our freelancers, our vendors or our business partners.”

Reader’s Digest may emerge from bankruptcy within 45 days to 90 days, Berner said. “There’s no reason to believe it won’t be an expedited process.”

The company will use a 30-day grace period to delay a $27 million interest payment due today on its 9 per cent notes maturing in 2017 to negotiate the final terms of the restructuring with its lenders.

Reader’s Digest will join publishers including Tribune Co and the owner of the Philadelphia Inquirer in bankruptcy. Journal Register Co, the owner of 20 daily newspapers, emerged from bankruptcy protection last week, five months after seeking protection from creditors. Reader’s Digest announced in January a plan to cut 8 per cent of its 3,500 jobs, require US workers to take five days of unpaid leave and suspend matching contributions to 401(k) retirement plans.

The company’s sales fell 1.4 per cent to $2.2 billion in the fiscal year ended June 30, Chief Financial Officer Tom Williams said in an interview. The publisher has reduced annual operating expenses by $100 million over the last two years, he said.

US circulation at Reader’s Digest plunged 14 per cent last year to 8.31 million from 9.68 million, compared with a drop of less than 1 per cent for the top 10 magazines, according to Magazine Publishers of America data.