Print | Share | Reprint

Houghton Mifflin to file Ch. 11 prepack

by Aviva Gat | Published May 11, 2012 at 4:15 PM

Houghton Mifflin Harcourt, which publishes educational materials for grade school students, plans to file for bankruptcy with a prepackaged reorganization plan that would eliminate about $3.1 billion in debt and $250 million in annual interest costs.

The Boston-based company announced Friday, May 11, that it has reached a debt-for-equity restructuring agreement with 70% of its senior secured lenders and bondholders. The company is now soliciting its other lenders, bondholders and shareholders and a Chapter 11 petition could follow in a matter of weeks, according to sources involved with the company who asked for anonymity.

"We are excited to have reached an agreement with our lenders and bondholders on a financial restructuring plan that will equitize our current long-term debt and put HMH in a financially stronger position for the future," HMH president and chief executive Linda K. Zecher said in the statement. "With a more appropriately-sized capital structure and greater financial flexibility, along with our world-class brand and innovative digital education solutions, we will be well-positioned to accelerate our growth initiatives and expand our digital platform."

The statement said the company plans to complete its restructuring in June.

Under terms of the plan, bank lenders and bondholders would receive 100% of the equity in the reorganized company. Trade and other unsecured creditors would be paid in full in the ordinary course of business. Equity holders would receive warrants exercisable for up to 5% of the company's reorganized equity if they vote in favor of the plan.

The plan would eliminate $3.1 billion in debt and reduce annual cash interest costs by about $250 million.

HMH has also obtained a commitment from Citigroup Global Markets Inc. for a $500 million debtor-in-possession loan that would be converted into exit financing upon the consummation of a plan, sources said, but they declined to disclose terms of the loan.

One source said HMH began negotiating its restructuring with the senior lenders about one to two months ago. The source said the agreement shows the lenders' confidence in the company moving forward after repositioning its balance sheets.

Founded in 1832, HMH provides educational materials to about 57 million students between kindergarten and 12th grade in the United States 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 Caldecott, Newbery, Printz, and Sibert Medal and Honor recipients.

Friday's statement said the restructuring won't affect its day-to-day operations.

In response to Friday's announcement, Moody's Investors Service downgraded HMH's corporate family rating, probability of default rating and debt instrument ratings to Ca from Caa3. Moody's said the outlook for the company is stable, but the ratings action reflects the high likelihood of a near-term default.

Friday's downgrade was not the first time Moody's lowered HMH's rating this year.

The Deal Pipeline issued a distress warning for HMH on Jan. 26 after Moody's downgraded its debts, citing an unsustainable capital structure. Moody's also said the company faces looming maturities on its revolver and term loan, which mature in December 2013 and June 2014, respectively.

Moody's said HMH is having a hard time improving its earnings, which is necessary to reduce the company's very high leverage and generate positive free cash flow, because of educational funding pressures at state and local governments.

HMH's restructuring counsel is Paul, Weiss, Rifkind, Wharton & Garrison LLP and its financial adviser is Blackstone Group LP. The lenders' restructuring counsel is Akin Gump Strauss Hauer & Feld LLP and their financial adviser is Houlihan Lokey Capital Inc.

Share:

Tags: bankruptcy | Houghton Mifflin Harcourt | prepackaged

Restructuring

Houghton Mifflin to file Ch. 11 prepack

Free preview

Meet the journalists

Aviva Gat

Senior Reporter: Bankruptcy

Movers & Shakers

Video

A fast start toward an uncertain finish

Sectors