TEXT-S&P cuts Reader's Digest to 'CCC-'

Overview
-- U.S. publisher and direct marketer Reader's Digest announced it could
violate its total leverage credit facility financial covenant.
-- The company's discretionary cash flow deficit has been greater than we
had expected, and deficits are not narrowing.
-- We are lowering our corporate credit rating two notches to 'CCC-' from
'CCC+' and lowering the issue-level ratings on the company's debt.
-- We would lower our corporate credit rating further if the company
can't address its potential financial covenant breach and its debt obligations
accelerated.

Rating Action
On Sept. 4, 2012, Standard & Poor's Ratings Services lowered its corporate
credit rating on New York City-based Reader's Digest Assn. Inc. two notches to
'CCC-' from 'CCC+'. At the same time, we removed the ratings from CreditWatch
with negative implications, where they were placed on July 31, 2012. The
outlook is negative.

We also lowered our issue-level rating on its senior secured notes due 2017 to
'CC' from 'CCC'. The recovery rating on its senior secured loan remains at
'5', indicating our expectation of 10% to 30% recovery of principal in the
event of payment default.

Rationale
The downgrade reflects the deterioration in the company's liquidity profile
and profitability, as well as its recent announcement of a potential covenant
breach. We project that the company could violate its total leverage and cash
interest coverage covenants in the reporting period ending Sept. 30, 2012. It
is our understanding that the company is in discussions with its lenders to
obtain covenant relief.

Reader's Digest's direct-mail and publishing businesses are subject to
significant medium-term structural risks. We view a meaningful decline in
liquidity or a covenant violation as a key short-term catalyst that would
contribute to a payment default.

In our opinion, there are significant uncertainties and limited visibility
surrounding Reader's Digest's revenues and earnings prospects given its
declining businesses and ongoing restructuring requirements. In our 2012 and
2013 base-case scenario, we believe that revenues could continue to decline at
a double-digit rate because of the impact of divestitures, a weak economy,
anemic consumer demand in Europe and the U.S., and secular pressures on the
business. We believe that EBITDA could continue to decline at a greater rate
because of the company's burdensome cost structure and our expectation of high
restructuring costs.

Sales compared to the same period last year, pro forma for the sale of
"Everyday with Rachael Ray" magazine, fell 18.7% in the three months ended
June 30, 2012. Covenant EBITDA decreased to $34.3 million from $57.1 million
stemming from an inability to reduce costs at the same pace as revenue
declines. Cash balances are the primary source of liquidity as the company
does not have a revolving credit facility. Liquid cash balances were only
about $42 million as of June 30, 2012, after subtracting about $62 million of
cash held by foreign subsidiaries, while negative discretionary cash flow was
about $92.9 million for the 12 months ended June 30, 2012.

On Aug. 23, 2012, the company announced it had reached a settlement with the
Federal Trade Commission (FTC) to pay up to $23.8 million to settle disputes
regarding its marketing campaign for Ab Circle Pro. The settlement requires an
initial payment of $5 million, $5 million within 180 days, and $3.8 million
within 270 days of the entry of the consent order. In addition, the company
could make an additional payment of up to $10 million within a year based on
consumer refund claims.

In our opinion, a potential covenant violation, continuing cash flow deficits,
required FTC payments, and our expectations for weak consumer spending in
Europe (where the company generates a significant proportion of sales) will
place significant pressure on Reader' Digest's "weak" liquidity profile and
has escalated the possibility of a payment default in the near term.

Outlook
We will lower the rating if the company can't address its potential financial
covenant breach and therefore its debt obligations are accelerated. Much less
likely, and depending on the success of the company's international business
transformation to a partnership and royalty model, we could revise the outlook
to stable or raise the ratings if the company improves its liquidity.

Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 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

Ratings List
Downgraded; CreditWatch/Outlook Action
To From
Reader's Digest Assn. Inc.
RDA Holding Co.
Corporate Credit Rating CCC-/Negative/-- CCC+/Watch Neg/--

Reader's Digest Assn. Inc.
Senior Secured CC CCC/Watch Neg

Downgraded; CreditWatch/Outlook Action
To From
Reader's Digest Assn. Inc.
Senior Secured
Local Currency CC CCC /Watch Neg
Recovery Rating 5 5