Digest-Size Debt Load

Reader’s Digest is filing for bankruptcy? Why? Such a strong publishing organization, it practically had a license to print money. Well, then again, so did many other print media.

Was it the cost of paper and postage or was it the Internet revolution? Partially, yes. I’d think most would agree the company was overly leveraged:

I remember wondering why it was a good idea to take a struggling company and load it up with leveraged buyout debt. But buyers were there for the debt, at interest rates that were not very high, and the deal was done.

Today Reader’s Digest said it will skip interest payments on a bond issue and file a prepackaged bankruptcy. The deal will give equity to some creditors, and slice debt from $2.2 billion to $550 million. The L.B.O. investors are wiped out, and creditors take large losses. Some creditors have agreed to put more money in. The publication will stay in business.

Add “The Digest” to the modern pantheon of P.E. failures.

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Duh, Yellow Pages

R.H. Donnelley filed for bankruptcy cited a “drop in ad revenue.” [Not R.R. Donnelly, the huge commercial/contract printer of periodicals and probably everything else — not that their revenue isn’t down.]

I never use the “yellow pages” any more. Go online and get a map, too. And quickly. Publishing directories is an outdated business model. The irony? Their creditors, according to Bloomberg:

“We have a very good business model; operations continue to be good,” Chief Executive Officer David Swanson said in an interview. “We never anticipated the economic downturn and the condition we find the financial market in today.”

The 30 largest creditors without collateral backing their claims are owed about $6 billion, according to court documents. The biggest unsecured creditors are Bank of New York, as agent for holders of senior notes, with a claim of $3.6 billion; U.S. Bank NA, also as agent for holders of senior notes, with a claim of $2.4 billion; and Google Inc., with a claim of $2.4 million.

R.H. Donnelley, through its units, publishes more than 600 print directories with a combined circulation of about 80 million, and provides advertising services to about 600,000 businesses in 28 states and the District of Columbia, according to court papers.

The case is In re R.H. Donnelley Corp., 09-11833, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Are there enough local souces to fill the gap should the local directories go away? I think so, especially if most people have Internet access.