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Houghton Mifflin to Exit Bankruptcy But Must Move Case

NEW YORK--Houghton Mifflin Harcourt Publishing Co. won permission to exit bankruptcy under a restructuring plan that will slash $3 billion in debt from the business behind publications ranging from mathematical textbooks to children's literature staple "Curious George." Judge Robert Gerber of the U.S. Bankruptcy Court in Manhattan Thursday said he would sign off on the publisher's plan and plan outline during a joint hearing that paves the way for the company to revamp its balance sheet exactly one month after seeking Chapter 11 protection. But he also dealt the Boston company a courtroom defeat, siding with a federal bankruptcy watchdog who sought to have the case transferred from New York court. Under Judge Gerber's decision, the company can move forward with its confirmation but will have to transfer the case either on the date the plan becomes effective or three weeks after his confirmation order is entered, whichever comes first. The timing is a strategic move meant to prevent the transfer from disrupting the company's restructuring efforts; Houghton Mifflin and its creditors had warned that moving the case from New York before the plan was confirmed could put its $500 million financing package in jeopardy. "I've responded to the U.S. trustee motion consistent with my oath while trying to protect the creditors as best I can," Judge Gerber said. Companies have some leeway when deciding where to seek bankruptcy, as laws allow them to file not only where their assets or operations are located but also where they are incorporated or where they have an affiliate. Still, some in the industry have protested the practice of strategically filing in commercial bankruptcy hubs like Manhattan and Wilmington, Del., making the issue a contentious one. Houghton Mifflin sought bankruptcy last month after striking a deal with key creditors including Anchorage Capital Group LLC, Apollo Management Holdings LP, Avenue Capital Group, Oakhill Advisors LP and Paulson & Co. that laid out the terms of the restructuring plan and directed the company to file in New York. Houghton Mifflin started to poll creditors on the plan--which hinges on a debt-for-equity swap--even before its debut in court, quickly gathering widespread support for the proposal. At the time of the company's bankruptcy filing, it said that 93% of holders of its senior secured debt, which includes bank debt and bond debt, and about 70% of its equity class had voted to accept the plan. The final voting tally showed that 100% of the company's voting creditors cast their ballots in favor of the plan. The plan sparked a handful of objections that were all resolved before Thursday's hearing, including dissent from the federal bankruptcy watchdog. U.S. trustee Tracy Hope Davis had taken issue with release and exculpation provisions folded into the plan but lent her support to the proposal following a few tweaks by the company. The trustee has proven to be the company's only major stumbling block during the case, launching the bid to have the venue switched despite the fact that all other constituents in the case were happy to see the proceedings play out in New York. Judge Gerber said Thursday that the trustee's decision to push for the venue change was "very troublesome" for him, "not because it was in any way improper but as a matter of prosecutorial discretion. "Here the venue choice was exactly what the creditors wanted," he said. "The case, if not slowed down by the U.S. trustee's motion, would be over in 30 days, and the U.S. trustee's motion was opposed by every party in the case with money on the line." Judge Gerber told the parties to decide which venue the case would be transferred to and said he would make a decision if they could not agree. In the meantime, Houghton Mifflin is poised to exit bankruptcy with some $110 million in net debt and about $150 million of cash on hand, according to court papers. Its $500 million bankruptcy loan from a group of lenders led by Citibank is set to morph into exit financing for the restructured company. Gerber gave that financing deal his final stamp of approval at the hearing Thursday. Under Houghton Mifflin's plan, secured lenders and bondholders will receive all the equity in the company plus $30.3 million in cash. Trade and other unsecured creditors will be paid in full in the ordinary course of business under the plan, and existing shareholders will get warrants to purchase up to 5% of the new stock. In its initial bankruptcy court papers, the company said it owed bank lenders led by Citibank $235.8 million on a first-lien revolving loan and $2.57 billion on a first-lien term loan. Senior secured bondholders are owed $300 million, and Wells Fargo Bank is owed $26.8 million on a letter-of-credit facility. In court papers filed this week, the company said it expects to pay down its term loan debt by 2017. Houghton Mifflin publishes textbooks used in grades pre-kindergarten through 12. It also publishes novels, nonfiction books, children's books and reference works, including such classics as J.R.R. Tolkien's "The Lord of the Rings" series and H.A. and Margret Rey's "Curious George" children's books. The company's educational software unit is behind such computer games as "The Oregon Trail." Upon filing for bankruptcy, Houghton Mifflin said it had debts totaling $3.5 billion as of March 31, compared with assets with a book value of nearly $2.7 billion. (Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to ) Write to Rachel Feintzeig at [email protected]

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