TEXT-Fitch: recovery for secured lenders after Readers Digest filing

Tue Feb 19, 2013 12:59pm EST

Feb 19 - The Readers Digest Association is the latest company to file a
second Chapter 11 bankruptcy petition, commonly referred to as a Chapter 22. The
terms of a pre-negotiated restructuring agreement would provide full recoveries
for holders of secured bank claims and would result in a debt to equity
conversion for secured note-holders.

RDA Holding, parent company of The Reader's Digest Association, announced on
Feb. 17, 2013 that it has reached a consensual agreement on the terms of a
financial restructuring with both its secured bank lenders and over 70% of the
holders of its secured notes. The company has obtained a $105 million debtor in
possession facility (DIP) to provide liquidity during the bankruptcy period and
repay its pre-petition secured bank lenders in full by rolling up the
pre-petition bank debt into the DIP. Under the agreement, the company would
convert $465 million of senior notes to common equity. The company anticipates
having approximately $100 million in debt when it emerges from bankruptcy, which
would be an 80% debt reduction.

The company was identified as one of 37 candidates for a return to bankruptcy
court in Fitch's report, Chapter 22 Bankruptcies and Other Repeat Filings,
published Aug. 20, 2012. The screen for companies at risk of a second (or third)
bankruptcy was based on issuer ratings levels of 'B-' and below.

Reader's Digest first Chapter 11 filing was made 3.5 years ago in August 2009.
The period between the first and second filing was close to the 34 month average
for the 50 repeat filers in Fitch's high yield default index as of August 2012.
At the time of the first filing, the company was overleveraged as a result of an
earlier going private transaction and was unable to sustain the capital
structure as it faced intense competition during the deep recession.

Despite significant debt reduction in the first restructuring, the company
continued to face challenges and again became unable to sustain its capital
structure. Like many print media companies, Reader's Digest struggled to adapt
to online media and other forms and is facing chronic decline in readership and
advertising in some of its 75 publications.

Companies with more than one default within a several-year period provide useful
examples of the primary reasons why initial attempts at successful
reorganization fail. Key drivers of second defaults are failure to resolve
operating cost issues or sufficiently reduce debt. Second defaults are also
frequent for issuers in industries that are in a deep cyclical trough or chronic
decline.

For more information on bankruptcies and creditor recoveries, please see our
report, "Reorganization Enterprise Values and Creditor Recoveries Fitch Case
Studies - Volume 2," dated Feb. 14, 2013 and available at www.fitchratings.com

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article, which may include hyperlinks to companies
and current ratings, can be accessed at www.fitchratings.com. All opinions
expressed are those of Fitch Ratings.
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