Earnings Weigh On Reader's Digest; Argosy Shows Upside

The Reader's Digest Association's earnings drop has led Standard & Poor's to downgrade the company's secured bank loan rating from BB+ to BB. The company's EBITDA fell roughly 16% in fiscal 2003 versus the previous year. Also, lower international profitability and higher investment spending is expected to lead to a weak operating outlook for the first half of fiscal 2004. EBITDA from international sources fell by 53% in fiscal 2003.

Reader's Digest is also plagued by an increased business risk as the company becomes more dependent on its Reiman, QSP and Books are Fun businesses. Although the three businesses had increases in their revenues in 2003, profitability for the divisions either declined slightly or remained flat. On the plus side, debt-to-EBITDA remained unchanged at 3.6 times since May 2002 due to strong discretionary cash flow and a draw down in cash balances. The company also expects to pay down $150 million of debt in 2004 and is banking on cost reductions to improve profitability in the second half of fiscal 2004. "The decision was not unexpected. We have been on credit watch since April and we were expecting a decision," said a Reader's Digest spokesman.

*Argosy Gaming Company's credit outlook has been changed to positive from stable by Moody's Investors Service despite tax increases and construction disruptions. The outlook affects the company's $400 million revolver and $269.5 million term loan, which are both rated Ba2. While cash flows are expected to be modestly negative at the end of 2003, due to the completion of the Riverside and Joliet projects, the company has a history of cash flow generation and could use free cash flow to reduce debt and leverage in 2004.

An upgrade of the company's credit ratings will depend on the success of the Riverside project, the ability of the company to manage its leverage and financial growth opportunities and to partially offset the impact of tax increases. A potential ratings boost would be supported by the company's asset profile and its conservative management style. "We're obviously pleased with the change in outlook," said Erin Williams, Argosy's v.p. and treasurer.