Dr. P.V. Viswanath



Economics/Finance on the Web
Student Interest


Reader's Digest Files Chapter 11 Protection Paperwork

By Mike Spector, August 24, 2009, WSJ


The publisher of Reader's Digest filed for Chapter 11 bankruptcy protection Monday as part of a prearranged restructuring plan approved by most of its lenders.

Readers Digest Association Inc. announced last week that it planned to restructure through bankruptcy. The privately held publisher of the popular monthly magazine said the filing affects only its U.S. operations

Under its pre-negotiated bankruptcy plan, senior lenders led by J.P. Morgan Chase & Co. would swap a significant amount of their $1.6 billion in debt for about a 92.5% equity stake in the reorganized company. The plan would cut the company's debt to $550 million from $2.2 billion. The company's board and senior management would get a 7.5% stake.

For a bankruptcy court to approve a reorganization plan, holders of two-thirds the value of a class of debt and more than half of the actual claims must agree to terms. The current support from senior lenders puts Reader's Digest on good legal footing to get the restructuring plan approved by a judge.

After continued negotiations, lenders holding nearly 80% of the value of Reader's Digest's senior debt and nearly 70% of the holders themselves have agreed to the deal, the company said last week.

The company's senior secured lenders have committed $150 million in new debtor-in-possession financing that can be converted into exit financing once Reader's Digest Association leaves bankruptcy protection.

Reader's Digest President and Chief Executive Mary Berner said Monday that the company's operations remain solid, with this year's revenue expected to be down only by low-single digits on a percentage basis, excluding foreign exchange impacts.

"We look forward to emerging with a restructured balance sheet and as a financially stronger organization that is positioned to pursue our growth and transformational initiatives," she said.

The bankruptcy filing marks another failed investment by a private-equity firm during the leveraged buyout boom a few years ago, when credit was easy and the economy stronger. The investment made by Ripplewood Holdings, which led a $1.6 billion buyout of the publisher in 2007, will be wiped out by the company's bankruptcy.

The publisher is another casualty of the mix of weak financial results, changing consumer tastes, and heavy debt that are pushing owners of newspapers, magazines and broadcasters into Chapter 11. Media and entertainment companies are currently among the leading defaulters on debt, according to Standard & Poor's Global Fixed Income Research.

Reader's Digest publishes 94 magazines and sells about 40 million books, music and video products each year.

Reader's Digest's is being advised on its restructuring by law firm Kirkland & Ellis LLP, investment bank Miller Buckfire & Co. and advisory firm AlixPartners LLP.



  1. If the company is bankrupt, why is the board and senior management getting any equity at all?
  2. Readers' Digest is currently owned by an investor group called Ripplewood. Under the terms of the pre-packaged bankruptcy, Ripplewood will have no ownership stake. Why would Ripplewood agree to this?
  3. What happens to trade creditors and other unsecured creditors? For example, there are $600m. worth of 9% senior subordinated notes (http://www.burbageweddell.com/2009/08/24/readers-digest-largest-unsecured-bankruptcy-creditors/#more-3292).