Reader's Digest to Seek Bankruptcy Shield

Caption In this photo provided by Reader's Digest magazine, the 1,000th issue of the 83-year-old mini magazine, is shown. The commemorative August 2005 issue, which comes out next week, includes a 95-page section devoted to "the big ideas that will change our lives in the next five to ten years," such as do-it-yourself doctoring, food as medicine and extreme vacations.
The publisher of Reader's Digest, the country's most popular general interest magazine, said Monday it will file for Chapter 11 protection with a plan to swap a portion of its debt for ownership of the company.

Reader's Digest Association Inc., owned by the New York private equity firm Ripplewood Holdings since 2007, said Monday it has reached an agreement in principle with a majority of secured lenders to erase a portion of the $1.6 billion they hold in senior secured notes. The lenders will get ownership in return.

The planned filing, which does not include operations outside the United States, comes amid declining circulation, an industrywide advertising slump and large debts.

Reader's Digest, the monthly magazine founded in 1922 as a collection of condensed articles from other publications, has been searching for a niche as the Internet upends the magazine industry's traditional business models.

This year's ad declines saw the closing of several high-profile titles including Conde Nast's Portfolio, Domino and Blender.

In June, Reader's Digest announced it would cut the circulation guarantee it makes to advertisers to 5.5 million, from 8 million and lower its frequency to 10 issues a year from 12.

In the second half of last year, the U.S. edition of Reader's Digest had circulation of 8.2 million, 2 percent above the guarantee to advertisers but 12 percent below circulation a year earlier. Its decision to adjust to rate base suggests expectations that circulation will drop further.

The company said Monday it will skip a $27 million interest payment on its 9 percent notes due in 2017 while it looks to build support among lenders for its restructuring plans.

In a statement, Reader's Digest CEO Mary Berner said the agreement follows "months of intensive strategic review of our balance-sheet issues."

The agreement includes $150 million in "Debtor-in-Possession" loans to finance the company during bankruptcy protection. Overall, the company plans to shrink its debt from $2.2 billion to $550 million following Chapter 11. It said the "vast majority" of suppliers will be paid in full under the bankruptcy plan.

The company said it will seek further agreements from lenders and other stakeholders before making a formal bankruptcy filing within a month.

Aside from Berner, all of the company's board members who have served since Ripplewood's $1.6 billion acquisition of the company in 2007 have resigned. Two members who recently joined will continue to serve.