Reader's Digest has filed for Chapter 11 bankruptcy this morning, according to The Wall Street Journal. Reader's Digest publishes 94 magazines and every years sells approximately 40 million books, music and video products each year. The filing is part of a pre-packaged plan which was worked out with the company's creditors in advance of the filing. Under the deal, the senior lenders get most of the company and the founders will be left with a measly 7.5% stake.
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.
The company has solid revenues, but its massive debt is what triggered the bankruptcy. This entire situation is the result of another leveraged buyout by a venture capitalist gone bad. The privately held company really had to choice here. Give up your ownership or get liquidated. They chose to give up most of their ownership.
Reader's Digest has 
