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Fitch: Recovery for Secured Lenders After Readers Digest Filing

February 20, 2013, 07:51 AM
Filed Under: Bankruptcy

The Readers Digest Association is the latest company to file a second Chapter 11 bankruptcy petition, commonly referred to as a Chapter 22. The terms of a pre-negotiated restructuring agreement would provide full recoveries for holders of secured bank claims and would result in a debt to equity conversion for secured note-holders.

RDA Holding, parent company of The Reader's Digest Association, announced on Feb. 17, 2013 that it has reached a consensual agreement on the terms of a financial restructuring with both its secured bank lenders and over 70% of the holders of its secured notes. The company has obtained a $105 million debtor in possession facility (DIP) to provide liquidity during the bankruptcy period and repay its pre-petition secured bank lenders in full by rolling up the pre-petition bank debt into the DIP. Under the agreement, the company would convert $465 million of senior notes to common equity. The company anticipates having approximately $100 million in debt when it emerges from bankruptcy, which would be an 80% debt reduction.

The company was identified as one of 37 candidates for a return to bankruptcy court in Fitch's report, Chapter 22 Bankruptcies and Other Repeat Filings, published Aug. 20, 2012. The screen for companies at risk of a second (or third) bankruptcy was based on issuer ratings levels of 'B-' and below.

Reader's Digest first Chapter 11 filing was made 3.5 years ago in August 2009. The period between the first and second filing was close to the 34 month average for the 50 repeat filers in Fitch's high yield default index as of August 2012. At the time of the first filing, the company was overleveraged as a result of an earlier going private transaction and was unable to sustain the capital structure as it faced intense competition during the deep recession.

Despite significant debt reduction in the first restructuring, the company continued to face challenges and again became unable to sustain its capital structure. Like many print media companies, Reader's Digest struggled to adapt to online media and other forms and is facing chronic decline in readership and advertising in some of its 75 publications.

Companies with more than one default within a several-year period provide useful examples of the primary reasons why initial attempts at successful reorganization fail. Key drivers of second defaults are failure to resolve operating cost issues or sufficiently reduce debt. Second defaults are also frequent for issuers in industries that are in a deep cyclical trough or chronic decline.

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