Reader's Digest Parent Co. Files Second Bankruptcy

Story first appeared on The Deal Pipeline -

The publisher of Reader's Digest magazine and other titles has turned the page to its second bankruptcy filing as too much leverage, leftover overhead costs and a more profound fall in revenue and profitability than forecast has led the company to seek out a $105 million debtor-in-possession loan and a prenegotiated reorganization plan centered on swapping debt for equity.

Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York in White Plains will consider the interim use of $11 million of the DIP financing, along with its cash collateral, at an afternoon hearing on Tuesday.

Reader's Digest Association Inc. filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York in White Plains, under the main case of its parent company, RDA Holding Co., on Sunday. Its international affiliates, including Canada, weren't included in the bankruptcy filing.

The company filed with 30 affiliates and has sought to jointly administer the cases. Drain will also consider the joint administration of the cases during Tuesday's hearing.

RDA Holding has secured a $105 million DIP loan from prepetition lenders Wells Fargo Principal Lending LLC, GoldenTree Asset Management LP, Empyrean Capital Partners LP and Apollo Management LP's Apollo Senior Floating Rate Fund to fund its reorganization.

The DIP has $45 million in new money and refinances its roughly $60 million prepetition secured credit facility. The DIP matures the earliest of Oct. 31 and the effective date of its reorganization plan.

Through the DIP, the refinanced loan is priced at either Libor plus 500 basis points, with a 3% floor on Libor or a base rate plus 400 basis points. The base rate has a 3% floor. The new-money portion of the DIP is priced at either Libor plus 950 basis points, with a 1.5% floor on Libor or a base rate plus 850 basis points, with a 1.5% floor on the base rate. If the company defaults on the DIP, the pricing increases by 200 basis points.

The DIP carries a 4.75% ticking fee, which would be paid on the undrawn amount of the new money portion of the loan starting 30 days from the petition date until the loan is fully funded. The DIP also has a 2% early termination fee, a 2% commitment fee on the new money portion of the loan and $30,000 per year administrative agency fee.

According to a declaration filed by RDA Holding president and chief executive Robert E. Guth, the company plans to cut its debt by 80% during its second trip through Chapter 11.

As Reader's Digest Association, then-owned by private equity firm Ripplewood Holdings LLC, the company first filed for Chapter 11 on Aug. 24, 2009, in White Plains, N.Y. During its case, it pruned its debt by 75%, left its operations intact and wiped out its prepetition equity holders. The company emerged from bankruptcy protection on Feb. 22, 2010, with RDA Holding as the parent.

The New York-based media and direct marketing company blamed its second bankruptcy filing on a business plan and financial forecasts that failed to "adequately account for the steep declines that the media industry has suffered over the last few years," the declaration said.

The company has also struggled due to its highly leveraged capital structure and its legacy overhead expenses. In addition, its international businesses have experienced a decline in profitability and subscription revenue.

RDA Holding began negotiations with its secured lenders, Wells Fargo Bank NA and Wells Fargo Principal Lending, as well as an ad hoc committee of its senior secured noteholders last year as it faced a potential covenant default on its secured credit facility.

The ad hoc group consists of GoldenTree Asset Management, Empyrean Capital and Apollo Management. The group holds roughly 70% of the senior secured notes, court documents said.

Under the terms of the prenegotiated plan, which has not yet been filed with the court, the holders of $464 million in senior secured notes will swap their debt for 100% of RDA's reorganized common stock.

RDA has $534 million in outstanding prepetition debt, including the senior secured notes, a more than $59.26 million secured credit facility with Wells Fargo and a $10 million unsecured term loan from Luxor Capital Group and Point Lobos Capital. Wells Fargo is the trustee and Wilmington Trust FSB is the collateral agent on the senior secured notes.

Under the reorganization plan, the DIP loan will convert into exit financing or be repaid in full in cash, through its reorganization plan.

The refinanced portion of the loan will convert to a "first out" exit term loan, while the new money portion of the DIP will convert to a "second out, first priority" exit term loan. The exit loans will mature on Sept. 30, 2015.

The first out exit term loan with Wells Fargo will be priced at Libor plus 600 basis points or a base rate plus 500 basis points. Libor has a 3% floor, while the base rate has a 4% floor. The second out exit loan will be priced at Libor plus 11% per annum or a base rate plus 10% per annum. There is a 1.5% floor on Libor and a 2.5% floor on the base rate. It also carries a 2% up-front fee and an up to 2% early termination fee. If the company defaults on the exit loans, the interest rate would increase by 200 basis points.

RDA must file its plan and disclosure statement within 25 days of its petition date. It plans to win confirmation of the plan by July 15 and exit from Chapter 11 by July 31, under the terms of its restructuring support agreement.

Through the reorganization plan, unsecured creditors will get a pro rata share of an undetermined amount. Its prepetition equity holders will be wiped out.

"After considering a wide range of alternatives, we believe this course of action will most effectively enable us to maintain our momentum in transforming the business and allow us to capitalize on the growing strength and presence of our outstanding brands and products," Guth said Sunday in a company statement.

"The complex transformation that we began 18 months ago under the leadership of a new senior management team has resulted in a more streamlined, more focused, and more profitable business, but we have unfortunately been unable to align our debt levels correspondingly. The Chapter 11 process, which will facilitate a significant debt reduction, will enable us to continue to redefine our business by focusing our resources on our strong North America publishing brands, which have shown a new vitality as a result of our transformation efforts, particularly in the digital arena," Guth said in the statement.

Reader's Digest Association, which publishes the second-largest paid subscription magazine in the U.S. in Reader's Digest, has been selling its underperforming and noncore businesses since 2011 in an effort to pay down its debt.

Last year, the debtor sold its Weekly Reader and Allrecipes.com businesses for $3.6 million and $175 million, respectively, and hired FTI Capital Advisors LLC as its financial adviser for the sale of its international entities, the declaration said.

The company, which has been in business for more than 90 years, produces and sells print and digital magazines, books, music and videos to consumers around the world.

According to court documents, Alden Global Capital holds a 17.77% stake in the company, while Point Lobos Capital holds a 13.55% stake. Its other large equity holders include Jefferies High Yield Holdings LLC (9.43%), GoldenTree Asset Management (9.22%), GE Capital Corp. (8.96%), JPMorgan Chase Bank NA (6.79%), and Goldman Sachs Asset Management LP (5.69%).

The debtor listed its assets at $1.12 billion and its liabilities at $1.18 billion in its petition.

RDA Holding's largest unsecured creditors include the Federal Trade Commission of Washington ($8.75 million), Williams Lea of New York ($5.97 million), HCL Technologies Ltd. of Vienna, Va. ($4.36 million), Quad/Graphics Inc. of Sussex, Wis. ($3.58 million) and RR Donnelley Receivables Inc. of Trumbull, Conn. ($1.61 million).

Debtor counsel is Michael Aiello, Marcia Goldstein and Joseph Smolinsky at Weil, Gotshal & Manges LLP. Evercore Group LLC is the company's investment banker.

Abhilash M. Raval, Blair M. Tyson and Michael E. Comerford at Milbank, Tweed, Hadley & McCloy LLP are counsel to Wells Fargo.

Nicole L. Greenblatt at Kirkland & Ellis LLP and Moelis & Co. are advisers to the ad hoc committee of noteholders.

Bankruptcy for AMF Bowling

story first appeared in Wall Street Journal

AMF Bowling Worldwide Inc., the world's largest operator of bowling alleys, filed for bankruptcy-court protection Tuesday after being squeezed by a cash crunch and failing to find a buyer for its business.

The filing marks AMF's second trip through bankruptcy since 2001. The company, which employs 7,000 people, has struggled with both a heavy debt load and a shift in the sport.

The bowling industry has been in flux for decades. Once largely a blue-collar pastime dominated by leagues, it has shifted to a sport aimed at middle-class players, who seek amenities and attractive facilities and are generally averse to joining the teams that provide bowling alleys with steady income.

Tom Clark, the commissioner of the Professional Bowlers Association, said that even as the number of people bowling at least once a year is at a high of about 70 million, only about two million are competing regularly in leagues.

AMF, which sold off its bowling alleys overseas in a previous restructuring, operates 262 bowling centers in the U.S. Small chains and mom-and-pop operators now dominate the industry, which includes more than 5,000 bowling alleys.

AMF said that it would have upgraded its facilities to cater to today's bowlers, but the economic downturn reduced its revenue, thwarting its plans. The company does have nine bowling centers with lounges and modern décor, a response to competitors like Lucky Strike, a chain of upscale bowling centers with a dress code.

Facing what it called "unmanageable" debt levels, AMF began searching for a buyer last year. After an unsuccessful hunt, it instead began reaching out to creditors to discuss a restructuring.

The deal, which will be subject to bankruptcy-court approval, calls for AMF to exit Chapter 11 under the ownership of its senior lenders, subject to rival bids at a court-overseen auction. Either way, the lenders, which are owed more than $216 million, would see their claims paid in full.

AMF said it expects to emerge from bankruptcy protection within the next five months. Steve Satterwhite, AMF's chief financial officer and chief operating officer, said they'd be recapitalizing their balance sheet and reducing debt.

AMF, which said it hosts more than 20 million bowlers a year, said its financial troubles are tied to the bowling industry's shift to open play from leagues. It also attracted fewer bowlers during the economic downturn, which slashed revenue while the company's fixed costs remained high.

Tuesday's bankruptcy filing came about a week after AMF defaulted on its debt obligations, according to Standard & Poor's.To ensure its uninterrupted operations while it restructures, AMF won court approval Tuesday afternoon to tap $35 million of a $50 million bankruptcy loan from some of its existing senior lenders, a group led by Credit Suisse .

The Mechanicsville, Va., company reported assets and debts that were each in the range of $100 million to $500 million in its bankruptcy petition, which court papers show was filed with the U.S. Bankruptcy Court in Richmond, Va.

In 1996, Goldman Sachs Group Inc. led a $1.37 billion leveraged buyout of AMF from Richmond, Va., businessman William Goodwin. The firm went public in November 1997 but was delisted from the New York Stock Exchange three years later.

AMF first sought Chapter 11 protection in July 2001 to address declining revenue and its acquisition of 260 additional bowling centers, which the company said it struggled to manage. AMF emerged from bankruptcy protection the following year under the ownership of its secured lenders, though it quickly sought a new owner.

Chicago private-equity firm Code Hennessy & Simmons bought the bowling company in a $670 million deal and presided over what AMF called a "simplify and transform" strategy that involved shedding foreign assets and installing new management. According to the company, its financial results showed improvements between 2005 and 2008.

Steve Johnson, executive director of the Bowling Proprietors' Association of America, said the bowling industry has been making a comeback in recent years.