Reader's Digest Parent Co. Files Second Bankruptcy

Story first appeared on The Deal Pipeline -

The publisher of Reader's Digest magazine and other titles has turned the page to its second bankruptcy filing as too much leverage, leftover overhead costs and a more profound fall in revenue and profitability than forecast has led the company to seek out a $105 million debtor-in-possession loan and a prenegotiated reorganization plan centered on swapping debt for equity.

Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York in White Plains will consider the interim use of $11 million of the DIP financing, along with its cash collateral, at an afternoon hearing on Tuesday.

Reader's Digest Association Inc. filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York in White Plains, under the main case of its parent company, RDA Holding Co., on Sunday. Its international affiliates, including Canada, weren't included in the bankruptcy filing.

The company filed with 30 affiliates and has sought to jointly administer the cases. Drain will also consider the joint administration of the cases during Tuesday's hearing.

RDA Holding has secured a $105 million DIP loan from prepetition lenders Wells Fargo Principal Lending LLC, GoldenTree Asset Management LP, Empyrean Capital Partners LP and Apollo Management LP's Apollo Senior Floating Rate Fund to fund its reorganization.

The DIP has $45 million in new money and refinances its roughly $60 million prepetition secured credit facility. The DIP matures the earliest of Oct. 31 and the effective date of its reorganization plan.

Through the DIP, the refinanced loan is priced at either Libor plus 500 basis points, with a 3% floor on Libor or a base rate plus 400 basis points. The base rate has a 3% floor. The new-money portion of the DIP is priced at either Libor plus 950 basis points, with a 1.5% floor on Libor or a base rate plus 850 basis points, with a 1.5% floor on the base rate. If the company defaults on the DIP, the pricing increases by 200 basis points.

The DIP carries a 4.75% ticking fee, which would be paid on the undrawn amount of the new money portion of the loan starting 30 days from the petition date until the loan is fully funded. The DIP also has a 2% early termination fee, a 2% commitment fee on the new money portion of the loan and $30,000 per year administrative agency fee.

According to a declaration filed by RDA Holding president and chief executive Robert E. Guth, the company plans to cut its debt by 80% during its second trip through Chapter 11.

As Reader's Digest Association, then-owned by private equity firm Ripplewood Holdings LLC, the company first filed for Chapter 11 on Aug. 24, 2009, in White Plains, N.Y. During its case, it pruned its debt by 75%, left its operations intact and wiped out its prepetition equity holders. The company emerged from bankruptcy protection on Feb. 22, 2010, with RDA Holding as the parent.

The New York-based media and direct marketing company blamed its second bankruptcy filing on a business plan and financial forecasts that failed to "adequately account for the steep declines that the media industry has suffered over the last few years," the declaration said.

The company has also struggled due to its highly leveraged capital structure and its legacy overhead expenses. In addition, its international businesses have experienced a decline in profitability and subscription revenue.

RDA Holding began negotiations with its secured lenders, Wells Fargo Bank NA and Wells Fargo Principal Lending, as well as an ad hoc committee of its senior secured noteholders last year as it faced a potential covenant default on its secured credit facility.

The ad hoc group consists of GoldenTree Asset Management, Empyrean Capital and Apollo Management. The group holds roughly 70% of the senior secured notes, court documents said.

Under the terms of the prenegotiated plan, which has not yet been filed with the court, the holders of $464 million in senior secured notes will swap their debt for 100% of RDA's reorganized common stock.

RDA has $534 million in outstanding prepetition debt, including the senior secured notes, a more than $59.26 million secured credit facility with Wells Fargo and a $10 million unsecured term loan from Luxor Capital Group and Point Lobos Capital. Wells Fargo is the trustee and Wilmington Trust FSB is the collateral agent on the senior secured notes.

Under the reorganization plan, the DIP loan will convert into exit financing or be repaid in full in cash, through its reorganization plan.

The refinanced portion of the loan will convert to a "first out" exit term loan, while the new money portion of the DIP will convert to a "second out, first priority" exit term loan. The exit loans will mature on Sept. 30, 2015.

The first out exit term loan with Wells Fargo will be priced at Libor plus 600 basis points or a base rate plus 500 basis points. Libor has a 3% floor, while the base rate has a 4% floor. The second out exit loan will be priced at Libor plus 11% per annum or a base rate plus 10% per annum. There is a 1.5% floor on Libor and a 2.5% floor on the base rate. It also carries a 2% up-front fee and an up to 2% early termination fee. If the company defaults on the exit loans, the interest rate would increase by 200 basis points.

RDA must file its plan and disclosure statement within 25 days of its petition date. It plans to win confirmation of the plan by July 15 and exit from Chapter 11 by July 31, under the terms of its restructuring support agreement.

Through the reorganization plan, unsecured creditors will get a pro rata share of an undetermined amount. Its prepetition equity holders will be wiped out.

"After considering a wide range of alternatives, we believe this course of action will most effectively enable us to maintain our momentum in transforming the business and allow us to capitalize on the growing strength and presence of our outstanding brands and products," Guth said Sunday in a company statement.

"The complex transformation that we began 18 months ago under the leadership of a new senior management team has resulted in a more streamlined, more focused, and more profitable business, but we have unfortunately been unable to align our debt levels correspondingly. The Chapter 11 process, which will facilitate a significant debt reduction, will enable us to continue to redefine our business by focusing our resources on our strong North America publishing brands, which have shown a new vitality as a result of our transformation efforts, particularly in the digital arena," Guth said in the statement.

Reader's Digest Association, which publishes the second-largest paid subscription magazine in the U.S. in Reader's Digest, has been selling its underperforming and noncore businesses since 2011 in an effort to pay down its debt.

Last year, the debtor sold its Weekly Reader and Allrecipes.com businesses for $3.6 million and $175 million, respectively, and hired FTI Capital Advisors LLC as its financial adviser for the sale of its international entities, the declaration said.

The company, which has been in business for more than 90 years, produces and sells print and digital magazines, books, music and videos to consumers around the world.

According to court documents, Alden Global Capital holds a 17.77% stake in the company, while Point Lobos Capital holds a 13.55% stake. Its other large equity holders include Jefferies High Yield Holdings LLC (9.43%), GoldenTree Asset Management (9.22%), GE Capital Corp. (8.96%), JPMorgan Chase Bank NA (6.79%), and Goldman Sachs Asset Management LP (5.69%).

The debtor listed its assets at $1.12 billion and its liabilities at $1.18 billion in its petition.

RDA Holding's largest unsecured creditors include the Federal Trade Commission of Washington ($8.75 million), Williams Lea of New York ($5.97 million), HCL Technologies Ltd. of Vienna, Va. ($4.36 million), Quad/Graphics Inc. of Sussex, Wis. ($3.58 million) and RR Donnelley Receivables Inc. of Trumbull, Conn. ($1.61 million).

Debtor counsel is Michael Aiello, Marcia Goldstein and Joseph Smolinsky at Weil, Gotshal & Manges LLP. Evercore Group LLC is the company's investment banker.

Abhilash M. Raval, Blair M. Tyson and Michael E. Comerford at Milbank, Tweed, Hadley & McCloy LLP are counsel to Wells Fargo.

Nicole L. Greenblatt at Kirkland & Ellis LLP and Moelis & Co. are advisers to the ad hoc committee of noteholders.

Education Textbook Giant Files Bankruptcy

Story first appeared in USA Today.

Houghton Mifflin Harcourt Publishers Inc. has filed for Chapter 11 bankruptcy protection after reaching an agreement to eliminate $3.1 billion of its debt, according to a Boston Bankruptcy Lawyer.

The textbook publisher's move Monday came as little surprise as it announced earlier in the month that it was planning to reorganize under a prepackaged bankruptcy plan. Such plans are made with creditors and shareholders ahead of the filing for bankruptcy to speed the process.

Houghton Mifflin said Monday that its plan is supported by the vast majority of its stakeholders and will help strengthen its financial position so it is better positioned for the future. It made the filing in U.S. Bankruptcy Court for the Southern District of New York.

The privately held company, based in Boston, has been struggling with heavy debt for years. Houghton Mifflin said last year that it was trying to reorganize its finances to improve its balance sheet, said Raleigh Bankruptcy Lawyers.

The company acquired Harcourt Education in 2007 for roughly $4 billion. While that deal helped make it one of the top sellers of kindergarten through 12th grade books, tough economic times brought cuts in public funding for education and hurt its textbook sales.

A Philadelphia Bankruptcy Lawyer noted that Houghton Mifflin has said its day-to-day operations will continue as normal under bankruptcy protection, and it expects to complete the process by the end of June.

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Fashion Designer Files for Bankruptcy Protection

Story first appeared in Dow Jones Bankruptcy Review.

Fashion designer Betsey Johnson's company filed for bankruptcy protection Thursday night in New York, following poor performance in its chain of retail stores according to New York Bankruptcy Lawyers.

The Chapter 11 filing by Betsey Johnson LLC will see most of the chain's 63 stores close, a person familiar with the matter said. Steven Madden Ltd., which owns the Betsey Johnson license, likely will keep four or five flagship stores in New York City and a few other cities, the person said.

The company employs about 400 people. Its largest creditors include Haskell Jewels, American Express Co. and FedEx Corp., according to the filing.

In the filing, the company said it started exploring strategic alternatives including a sale in January. The following month, it enlisted the help of Morpheus Capital & Advisors LLC to help it find new equity investors or sell the company, the filing said.

Morpheus reached out to 22 potential buyers and investors. The company was in the final stages of a deal to sell its assets earlier this month when the would-be buyer "abruptly" backed out, according to papers the company filed with the court. Negotiations with other potential purchasers failed to result in a deal, and the company decided to file Chapter 11 to sell itself to either a buyer that would keep it operating or liquidate its assets.

The designer was known for her over-the-top personality, designing clothes with bright neon colors and ending her runway shows by turning cartwheels. She founded her label in 1978 with a former model. The company had outlined plans to have 100 stores in 22 states by 2012.

In 2010, a stake in the business was sold to Boston-based private equity firm Castanea Partners. Steven Madden came into the picture that same year after the company breached loan covenants and was forced to restructure its debt. Steven Madden holds a 10% stake in the company and owns its intellectual property, and Castanea holds the remaining 90% stake.

The 2010 restructuring wasn't enough to make the company profitable again. In court papers, the Betsey Johnson Chief Financial Officer, blaming the U.S. recession's effect on "higher-end fashion apparel brands," said sales at the company's retail stores have fallen by more than 20% since 2007 and profitability has declined by more than 50%.


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