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Houghton Mifflin heads to confirmation in New York

by Aviva Gat | Published June 19, 2012 at 2:28 PM

A New York judge declined to make a decision on the U.S. trustee's request to drive Houghton Mifflin Harcourt Publishing Co.'s bankruptcy case to Boston, just days before a scheduled confirmation hearing.

Judge Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan took the matter under advisement after a Monday, June 18, hearing, according to debtor counsel Alan W. Kornberg of Paul, Weiss, Rifkind, Wharton & Garrison LLP.

Kornberg said the combined hearing to confirm the publishing company's reorganization plan and approve its disclosure statement, scheduled for Thursday, will go forward as planned.

U.S. Trustee Tracy Hope Davis had asked the court to defer the confirmation hearing until ruling on the venue transfer motion.

Davis requested HMH's bankruptcy case be moved to the U.S. Bankruptcy Court for the District of Massachusetts in Boston on May 30, saying that the debtor is "one of Boston's largest employers" and that neither HMH nor any of its 24 jointly administered affiliates are domiciled in New York.

HMH responded on June 11, asserting that New York is the correct venue for its reorganization because it has a long-standing office in New York where it conducts sales and editorial activity. In addition, HMH said one of its holding companies, Houghton Mifflin Holding Co., has principal assets in New York. Finally, HMH asserted a venue transfer would not be convenient nor in the interest of justice for all creditors.

On Thursday, HMH will seek confirmation of its prenegotiated debt-for-equity swap that would eliminate $3.1 billion in debt and $250 million in annual cash interest payments.

Davis objected to the plan on June 15, asserting that it contains releases and exculpation provisions "that exceed the bounds of the law." Davis said the plan limits the liability of attorneys and their clients and contains overly broad provisions that extend to nonestate fiduciaries.

HMH filed for Chapter 11 on May 21 after reaching a restructuring agreement with 70% of its senior secured lenders and bondholders.

Bondholders and shareholders voted 100% to accept the plan by a June 11 deadline.

Under the plan, letters of credit would either be reinstated or be replaced by an exit facility. General unsecured creditors would either receive cash equal to the amount of their claims plus interest or have their claims reinstated.

Shareholders would receive warrants exercisable for up to 5% of the company's reorganized equity if they voted in favor of the plan.

Negotiations with the senior secured lenders came two years after an out-of-court restructuring failed to solve HMH's financial problems. On March 9, 2010, the company gave its equity to its then-lenders to eliminate $4 billion in debt and held a $650 million rights offering for additional shares.

Founded in 1832, HMH provides educational materials to about 57 million students between kindergarten and 12th grade in the U.S. and 120 other countries. The company also publishes numerous award-winning novels, nonfiction and children's books from authors including Ralph Waldo Emerson and Jonathan Safran Foer. In addition, HMH publishes brands including "Curious George" and "The Lord of the Rings." HMH has published eight Nobel Prize winners, 47 Pulitzer Prize winners, 13 National Book Award winners and more than 100 recipients of the Caldecott Medal, the Newbery Medal and Honor, the Printz Award and the Sibert Medal and Honor.

HMH is using a $500 million debtor-in-possession loan arranged by Citigroup Global Markets Inc. to fund its reorganization.

The DIP, which consists of a $250 million revolver and a $250 million term loan, matures 18 months from the petition date or on consummation of a plan, whichever comes first. On its conversion to an exit facility, however, the revolver will mature five years from closing, and the term loan will mature one year thereafter.

Under the DIP, HMH must win confirmation by Aug. 19 and emerge from Chapter 11 by Sept. 18.

Gerber approved the DIP on an interim basis on May 22 and will consider the final approval on Thursday along with the adequacy of HMH's disclosure statement and confirmation of its plan.

In 2011, HMH had $238 million in Ebitda on $1.3 billion in revenue.

Along with Kornberg, Jeffrey D. Saferstein and Philip A. Weintraub of Paul Weiss are also debtor counsel. HMH's financial adviser is Blackstone Group LP.

Akin Gump Strauss Hauer & Feld LLP represents a group of senior lenders, while Houlihan Lokey Capital Inc. is its financial adviser.

Fredric Sosnick and Edmund M. Emrich of Shearman & Sterling LLP are counsel to Citigroup.

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