Readers Digest Bankruptcy

Reader’s Digest is ready to exit Chapter 11 bankruptcy after its bankruptcy restructuring plan was approved by the bankruptcy court.

Under the bankruptcy plan, senior lenders owed $1.6 billion will receive all the equity in the reorganized company plus a new $300 million loan. Another $105 million loan will remain in place. Bondholders owed more than $600 million will receive warrants, an offer that practically wipes them out.

Different groups of unsecured creditors would see widely different recoveries. Companies that will continue to do business with Reader’s Digest after it emerges from bankruptcy-about 800 vendors-will see a full recovery. The retiree group, owed about $80 million, would see a recovery of less than four cents on the dollar.

Of course the retiree group strongly opposed Reader’s Digest’s bankruptcy plan, but bankruptcy Judge Robert Drain rejected their argument that the plan discriminated against them.  He stated that the bankruptcy distribution plan met the requirement of the bankruptcy code and that is was essential to the company’s ability to remain viable after emerging from bankruptcy. However, most of Reader’s Digest retirees are unaffected by the company’s bankruptcy plan and will continue to receive pension payments. The opposing retirees were part of a subset of retirees who receive supplemental pension benefits.

Reader’s Digest filed Chapter 11 bankruptcy in August, because it was financially struggling due to declining advertising revenue and a heavy debt load stemming from acquisitions done in 2007.  Many analysts predict that Reader’s Digest will emerge from Chapter 11 bankruptcy a stronger company; but may not remain viable unless it creates a powerful strategy to compete with online publishers.

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