Reader's Digest Drama in Real Life: Chapter 11

Reader's Digest, the coffee-ringed, literary staple of grandparents' coffee tables, recliner-side book stacks and flea market "all-you-can-grab" tables, is filing Chapter 11 bankruptcy. Clearly a sign that even the most family-friendly print media stalwarts are not immune from the impact of Internet news and YouTube versions of "drama in real life," the company's bankruptcy has been pre-arranged and if approved by a bankruptcy judge, will cut what it owes from $2.2 billion to $550 million.

Reader's Digest is the world's most widely read magazine with offices in 45 countries. It also publishes an array of additional media, such as music and home videos.

The company, Reader's Digest Association, Inc., had pre-arranged its plan with creditors and attorneys, proving again that bankruptcy is becoming a much more organized strategy for big companies to leverage when re-structuring debt. The publishing company's interest payments alone will be reduced to below $80 million from almost double that amount.

Company CEO, Mary Berner, is optimistic about the impact of the planned bankruptcy. Upon the announcement, she stated that "Our deal has already been negotiated and hammered out with a majority of our creditors..." She elaborated that it will not result in mass layoffs or sweeping company cutbacks. It's simply "... business as usual."

However, the company did announce the layoff of more than 3,000 employees in January of this year and asked other employees for five days of unpaid leave. Matches to employee retirement investments were also suspended.

Again, like a number of large companies who have filed bankruptcy and emerged quickly, Reader's Digest expects to complete the restructuring in under 90 days. Granted, the pre-arranged agreements with creditors and strict preparation with company attorneys has helped put everything in place prior to formally petitioning in court, which the company expects to do within the next couple of weeks.

While the smaller, handheld magazine is quite literally a proverbial ear of Gothic, Midwestern Americana, it remains exposed by the growth of the free-news world. Internet-based content has driven print ad sales to historic lows and printing press operations back to the days of Gutenberg.

While subject to court approval, Reader's Digest plans to swap $1.6 billion in secure debt for equity and grant ownership of the company to a team of lenders. The company's current owner, Ripplewood Holdings LLC., which bought the company in 2007 and took it private, will no longer have a stake in any of the company's operations, even though the bankruptcy only applies to its holdings within the United States. The move back to being a private company may have very well driven the bankruptcy, as it takes a substantial amount of money, typically in the form of debt, to buy back all the stock. It looks as if they simply borrowed too much in the process.

Some of the more prominent members of the lender group will also provide operating capital to the tune of $150 million to fuel the reorganization process. JPMorgan Chase, GE Capital and Eaton Vance are among those senior lenders.