JPMorgan and Royal Bank of Scotland are leading a new five-year, $400 million revolver for Reader's Digest that cuts interest payments, positions the company to move toward investment-grade status and increases potential dividends to shareholders.
The bank line replaces a J.P. Morgan-led revolver and term loan the company put in place in 2002 with the $760 million acquisition of Reiman Publications. Michael Geltzeiler, senior v.p. and cfo, said the company borrowed close to $1 billion for the acquisition as well as to pay out shareholders on two classes of stocks. With the increased bank debt, the company was leveraged just over four times, causing the rating agencies to move the company to non-investment grade.
In 2004, the company issued $300 million of seven-year bonds at 6 1/2% to start to pay off the term loans and diversify borrowings. Geltzeiler said the company's financials continued to improve as it paid back over $200 million from cash flow generated by core operations along with the sale and leaseback of its Pleasantville, N.Y., facility. The sale and lease generated $48 million while the company's 2004 EBITDA was about $230 million. The company lowered its debt to EBITDA ratio to 2.7 times.
Still, the company faced two challenges, Geltzeiler said. First, the debt was "pricey relative to where we thought the market was" with the revolver priced at LIBOR plus 3% and the $385 million term loan at LIBOR plus 2%. The second issue was dealing with covenants placed on the company by the banks: a maximum of $50 million for share buy backs and a $20 million maximum for dividends.
The company approached RBS and JPMorgan, two banks Geltzeiler said the company had "strong banking relationships" with, and discussed the prospect of establishing a new revolver. To choose the banks, Geltzeiler relied on past relationships and said JPMorgan has a long history with the company, leading its public debt as well as prior revolvers. It also looked for a large international presence for its co-lead. "Given that Reader's Digest operates in 49 plus countries, [we] thought it would be beneficial to have a strong domestic bank as well as a strong partner on the international side," Geltzeiler said. Other banks in the syndicate include Goldman Sachs, Wachovia Bank, Commerce Bank and HSBC Bank.
The new line is significantly cheaper than its predecessor. The revolver is priced at LIBOR plus 1 1/4%, down from LIBOR plus 3% and is based on leverage not ratings. If the company moves to 2 1/2 to 2 times leverage, which Geltzeiler said he thinks could happen in three months, pricing would move to LIBOR plus 1%. If leverage drops below 1 1/2 times, pricing would go to LIBOR plus 50 basis points. The company has a leverage cap of 3.5 times.
In the future the company will be looking to continue to grow and continue to deleverage. It will also increase its dividends from $20 million to $40 million. "That's our primary focus at this stage, generate strong cash flows, invest in the business but use our cash to reduce shareholder base and return cash to shareholders and continue to delever," Geltzeiler said.