TEXT-S&P: Cuts Reader's Digest Rating To 'CCC+' From 'B'
(The following was released by the rating agency)
-- New York City-based publisher and direct marketer Reader's Digest Assn. Inc.'s EBITDA declined year-over-year in the second quarter of 2011, and its margin of compliance under its financial covenants remains narrow.
-- We are lowering our corporate credit rating on Reader's Digest to 'CCC+' from 'B'.
-- We are lowering our ratings on Reader's Digest's $525 million senior secured notes to 'CCC' from 'B'. The recovery rating was revised to '5' from '4' because the company obtained a new $45 million secured term loan that ranks senior to the notes.
-- The rating outlook is negative, reflecting weakening consumer confidence and our expectation that the company will continue to face unfavorable cyclical and secular headwinds, which we believe could reduce its liquidity.
NEW YORK (Standard & Poor's) Aug. 31, 2011--Standard & Poor's Ratings Services today lowered its corporate credit rating on Reader's Digest Assn. Inc. to 'CCC+' from 'B'. In addition, we lowered our ratings on the company's $525 million senior secured notes to 'CCC' from 'B'. The recovery rating was revised to '5' from '4', because the company obtained a new $45 million secured term loan on Aug. 12, 2011, which ranks senior to the notes. Our rating outlook is negative.
"We lowered the ratings based on the company's weak second-quarter results, its narrow cushion of compliance with financial covenants, vulnerability to economic cyclicality, and our view that its weakened brands and eroding consumer confidence could further reduce liquidity," said Standard & Poor's credit analyst Tulip Lim.
Our rating on Reader's Digest reflects our expectation that the company will continue facing secular pressure in its publications business; that its publishing business will remain highly competitive; that there are minimal growth prospects in its direct marketing business; and that its direct marketing model--selling music, videos, and books--will become increasingly uncompetitive. It also reflects the dated image of the Reader's Digest flagship magazine. These considerations support our view of the business risk profile as "vulnerable" and our expectation that sales will continue to decline. We consider the company's financial profile to be highly leveraged, given its significant debt burden.
Our base-case scenario for full-year 2011 indicates revenue, excluding fair value adjustments and currency exchange movements, declining at a percentage rate in the teens because of weakening consumer sentiment and revenue declines in the Ab Circle Pro product. We believe that, despite the roll-off of higher marketing expense in the first half, full-year EBITDA could decline over 30%. For the second quarter ended June 30, 2011, revenue declined 6%, but excluding fair value adjustments and foreign exchange, revenue fell 18% because of a decline in sales in Ab Circle Pro, softness in some international markets, and declining advertising revenue and renewals in some magazines. The company's EBITDA (after restructuring expenses and stock-based compensation) dropped 26%.
Despite a roughly 75% reduction in debt as a result of a bankruptcy process concluded Feb. 22, 2010, adjusted debt-to-EBITDA is high at roughly 5.4x for the 12 months ended June 30, 2011, and in line with the indicative debt-to-EBITDA ratio of above 5x that we associate with a "highly leveraged" financial risk profile. On Aug. 12, 2011, the company obtained a new $45 million secured term loan and a new $10 million unsecured term loan. Following the quarter-end, the company drew down its entire revolving credit facility. We expect leverage, including the new term loans, the additional revolver borrowings, and our expectation of further EBITDA declines will rise.
Adjusted coverage was 1.7x for the twelve months ended June 30, 2011. Discretionary cash flow was negative for the same period. Even excluding high bonus payments and costs related to the bankruptcy reorganization, discretionary cash flow for the period would have been negative. We expect that discretionary cash flow will remain negative because we believe EBITDA will continue to decline.
RELATED CRITERIA AND RESEARCH
-- Standard & Poor's Standardizes Liquidity Descriptors, July 2, 2010
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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