A year of so ago, we analyzed Reader's Digest post reorg equity, which trades on the distressed desks. At that time, the equity traded at 20 dollars a share. Today the equity trades for 9 dollars a share. Reason: Poor management capital allocation skills and weaker than expected results.
"On August 12, 2011, the Company entered into and borrowed the full amount under a term loan and guarantee agreement, providing the Company with a $45.0 million secured term loan, and an unsecured term loan and guarantee agreement, providing the Company with a $10.0 million unsecured term loan, each with Luxor Capital Group, as administrative agent; the Guarantors (defined in each agreement); and the lenders thereunder (who are affiliates of RDA shareholders). The secured term loan matures in November 2013 and bears interest at the rate of 7.00% per annum. The unsecured term loan matures in May 2014 and bears interest at the rate of 11.00% per annum. The new credit facilities contain substantially the same covenants and limitations as our existing senior revolving credit facility, although in certain cases they are more restrictive. The proceeds of the new credit facilities will be used for seasonal working capital and general corporate purposes. In addition, in connection with the unsecured term loan, the Company issued two tranches of warrants to the lenders under the agreement. The first tranche of warrants provides the holders with the right to purchase up to 1.125 million shares of the Company’s common stock at an exercise price of $17.50 per share. The second tranche of warrants provides the holders with the right to purchase up to 1.25 million shares of the Company’s common stock at an exercise price of $15.00 per share. Both tranches of warrants expire two years after the issue date. Previously, the Company had drawn down the balance of its senior revolving credit facility."
Tom Williams, New CEO: "This past week, we entered into two term loan agreements that provided $55 million of incremental cash. The new $45 million secured facility was originally contemplated under the structure of the debt agreement that we put in place at the time we emerged from Chapter 11. Recognizing the need for additional seasonal working capital, given the peaks and troughs of our business, the company conducted a thorough process to raise new capital. After speaking with multiple potential lenders, we entered into serious negotiations with several parties and we are very pleased that we're able to close the financing last week, in light of the challenging capital markets environment.In the end, we entered into a transaction with lenders that are affiliates of two of our shareholders. The agreements call for $45 million of secured loans with a term of 2-1/4 years and an interest rate of 7% and $10 million of unsecured loans with the term of 2-3/4 years and an interest rate of 11%, which also provides for warrants to be purchased of 2.375 million shares of Class A common stock.The primary use of this new cash is for seasonal working capital needs."
- Someone forgot to carry the 1 when they were projecting working capital draws apparently. That $43M you spent for shares at $29/share looks pretty precious right now if you ask me. (Especially considering they also drew down on their revolver!)
- Luxor is getting an extremely attractive deal. This is essentially 2.5 year paper, senior secured, with a healthy rate, AND warrants.