By Joseph Checkler
A judge on Tuesday said Reader's Digest Association could begin
borrowing on a $105 million bankruptcy loan from a group including
Wells Fargo & Co. (WFC) at the debut hearing of the publisher's
second Chapter 11 case in less than four years.
Judge Robert Drain of U.S. Bankruptcy Court in White Plains,
N.Y., said Reader's Digest could tap $11 million of the loan and
also approved the company's initial requests to pay its nearly 500
employees and make payments to vendors, among other things.
Joining Wells Fargo on the loan are a group of Reader's Digest's
senior lenders owed $465 million. Those lenders have agreed to swap
100% of their debt for the equity in a reorganized Reader's Digest,
the lynchpin of what the company hopes will be a quick trip through
Chapter 11. The lenders, 70% of whom support the company's plan,
include Apollo Investment Corp. (AINV), Goldentree Asset Management
LP and Empyrean Capital Partners LP.
Of the $11 million approved Tuesday, $10 million will be used to
fund Reader's Digest's day-to-day operations and the rest will go
toward fees to the lenders. A lawyer for Reader's Digest said some
of the final terms of the order that Judge Drain must sign are
still being worked out, but the judge said he would approve it as
long as it's consistent with what was presented in court.
The $105 million loan includes $45 million in new money and
another $60 million that will refinance an existing loan made last
year by Wells Fargo. Reader's Digest will ask for the remaining $34
million in new money at a later hearing, probably next month.
Judge Drain took the bench nearly three-and-a-half years to the
day after overseeing the first-day proceedings of the company's
first bankruptcy, which Reader's Digest exited in early 2010.
"This time it's different," said Weil, Gotshal & Manges
LLP's Joseph H. Smolinsky, an attorney for Reader's Digest. Mr.
Smolinksy said the company's current management team has
streamlined its vision of the company, including selling off some
valuable publications to generate cash last year.
He said the company expects to exit bankruptcy within four or
five months, "leaner and poised" to move ahead with a lighter debt
load. Mr. Smolinsky said lenders have agreed to convert the $105
million bankruptcy loan into "exit financing" that can be used
after the company emerges from Chapter 11.
Reader's Digest's 2009 trip through bankruptcy took just four
months and reduced its debt by more than $2 billion. That deal
wiped out private equity owner Ripplewood Holdings and put the
company in the hands of lenders led by J.P. Morgan Chase & Co.
(JPM).
When it emerges from bankruptcy, Reader's Digest said it hopes
to have only about $100 million in debt.
In 2011, about a year and a half after it emerged from the first
bankruptcy, Reader's Digest hired advisers in an effort to sell
itself, hoping to fetch about $1 billion.
Since then, Chief Executive Bob Guth, the company's third CEO
since it emerged from that previous bankruptcy, has generated some
cash by selling businesses, most notably Allrecipes.com, which went
for $175 million to Meredith Corp. (MDP) last year, and the
classroom magazine Weekly Reader, sold to its chief rival,
Scholastic News publisher Scholastic Corp. (SCHL). Mr. Guth has
also pursued a strategy to increase Reader's Digest's digital
presence around the world while licensing out its international
businesses, but nearly all of the company's units have been
unprofitable lately.
So the company filed for Chapter 11 late Sunday, blaming the
ongoing struggles in the print media industry as well as its debt,
still a burden though not as bad as it was before the 2009
bankruptcy.
Reader's Digest, based in New York with operations in 41 other
countries, prints 75 magazines, including 49 different versions of
its namesake publication. U.S.-paid subscriptions for the flagship
Reader's Digest magazine totaled 5.9 million as of Dec 31, 2012,
the company said in court papers.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com.)
Write to Joseph Checkler at joseph.checkler@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires