In a jarring reminder that hope does not pay scheduled interest payments, Readers' Digest announced it is about to file for bankruptcy. And since bondholders don't accept hope in lieu of cash, the company announced that not only would it not make its $27 million coupon payment but that it would undergo a prearranged Chapter 11 process in which its secured lenders would end up owning the company concurrent with a 75% haircut in their holdings.
From the recent press release:
The agreement in principle includes a commitment from certain members
of the senior lender group to provide $150 million in new money
Debtor-in-Possession (DIP) financing, convertible into exit financing
upon emergence, which the company expects will ensure sufficient
liquidity during the reorganization process and beyond. In addition to
providing RDA with the necessary capital to emerge from Chapter 11, the
arrangement also establishes the substantive terms of the $550 million
in debt that will remain on RDA's balance sheet upon emergence, a 75
percent reduction from the current $2.2 billion in debt.
Alas the optimism presented 3 months ago by William Adler, VP of Communications, ended up being just a lot of hot air, much like the mysterious bid pushing the market higher since March. From an informative May article:
The company has "no plans whatsoever to file Chapter 11," said Adler,
and is in compliance with all its debt covenants. The most likely
outcome for the company would be for Kirkland & Ellis and Miller
Buckfire to attempt to negotiate some sort of out-of-court
restructuring with the creditors.
Luckily someone benefitted from the deal:
At the time, many analysts believed Ripplewood had out-negotiated
Reader's Digest and faulted both its board of directors and its
financial advisors, Goldman Sachs, which received an $11 million fee
for its advice, and former Goldman banker Michael Lynch, who received a
$2.75 million fee, for failing to get a better deal for shareholders.
Lawsuits on their behalf against Reader's Digest, Ripplewood and its
co-investors were later settled. (Ripplewood, Goldman and Miller
Buckfire all declined to comment for this story.)
The bankruptcy will be a swift blow to the LBO sponsors who acquired the company in November 2006:
There was a surfeit of optimism when Ripplewood and its
co-investors agreed to take the Reader's Digest Association private in
November 2006 for $17 per share, at an aggregate value of $2.4 billion.
"We are very excited to reach this agreement to acquire Reader's
Digest, a truly wonderful company with a broad array of global assets
and growth businesses that are extending a rich heritage," Tim Collins
said back then. Of the equity account of $375 million, Ripplewood
invested $275 million. (Its co-investors: J. Rothschild Group;
GoldenTree Asset Management; C.V. Starr & Co.; GSO Capital
Partners, now part of the Blackstone Group; Merrill Lynch, now part of
Bank of America; and Magnetar Capital, an $8 billion hedge fund founded
by Alex Litowitz.)
One wonders what Tom Collins carry at Ripplewood is valued at these days. At least the company got a nice hat tip in the "we are dead" press release filed today:
"We also thank our sponsor Ripplewood Holdings, who has provided
inspired vision and stewardship over the last two and a half years,
including during this process," added Berner. In March 2007, Ripplewood
led a consortium of investors in a transaction that resulted in the
company's acquisition. All of the members of the company's Board of
Directors who have served since the March 2007 acquisition, with the
exception of Berner, have resigned from the company's Board. The two
recently appointed directors also continue to serve on the Board.
One wonders if Ripplewood's LPs share the same gratitude for the PE firm, which managed to destroy $275 million in equity value in less than 3 years.