In a statement Monday, Reader's Digest’s Chief Executive Officer Mary Berner said that the decision to file for bankruptcy comes after "months of intensive strategic review of our balance-sheet issues".
“Restructuring our debt will enable us to have the financial flexibility to move ahead with our growth and transformational initiatives,” Berner added.
The company, owned by a group led by PE firm Ripplewood, has reached an agreement in principle with majority of its lenders on the terms of the restructuring plan.
Terms of the deal
As per the agreement, the senior secured lenders will exchange $1.6 billion in senior secured notes for transfer of ownership in return.
The company’s lenders include, Bank of America, JP Morgan, Eaton Vance, Ares, and GE Capital. The lenders will provide $150 million bankruptcy loan, debtor-in-possession financing etc to make sure that the firm has enough finances for its reorganization.
The company will delay $27 million interest payment due today on its 9 percent notes maturing in 2017 by 30 days and use this period to negotiate bankruptcy procedure with the lenders.
The purposed plan is expected to reduce the company’s debt to $550 million from $2.2 billion.
Slump in advertising revenue
The company’s advertising revenue and sales have been hit hard by the on-going recession.
According to Publishers Information Bureau data, ad sales at Reader’s Digest fell 7.2 percent to $121.2 million in the first half compared to the same period in the previous year. Further, the sales of the company have slipped 1.4 percent to $2.2 billion for the financial year ended June 30.
In a cost-cutting move, Reader’s Digest had laid off 8 percent of its staff, announced furloughs across the board and suspended contribution to employee retirement plans, in January this year.
In June, the magazine announced that it would lower the circulation assured to its advertisers to 5.5 million from 8 million and cut down on the number of monthly U.S. edition to 10 from 12 in a year.
Business as usual
“Because this is a pre-arranged deal, it’ll be business as usual,” Berner stated. “There’s no anticipated layoffs, no anticipated business closings, no anticipated effect on our employees, our freelancers, our vendors or our business partners.”
Further, the expected bankruptcy is only limited to company’s business in the United States. Its operations in Canada, Latin America, Europe, Africa, Asia, and Australia-New Zealand will remain unaffected.
The company is expected to emerge from bankruptcy within two-three months, said Berner. “There’s no reason to believe it won’t be an expedited process.”
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