The Deal: Cengage Files Ch. 11 Seeking Debt Relief

NEW YORK ( TheDeal) - Cengage Learning Inc., the privately-held educational publisher, filed for Chapter 11 this week after reaching a restructuring-support agreement with first-lien lenders that may eliminate more than $4 billion in debt.

The Stamford, Conn.-based company on Tuesday submitted a petition in U.S. Bankruptcy Court for the Eastern District of New York in Brooklyn.

Judge Elizabeth S. Stong has yet to set a hearing date on Cengage's first-day motions to pay certain pre-petition claims by shippers and warehouse employees acontinue insurance programs, continue to honor customer obligations, to extend its deadline to file schedules of assets and liabilities and for joint administration of its case with those of affiliates Cengage Learning Acquisitions Inc., Cengage Learning Holdings II LP and Cengage Learning Holdco Inc.

Cengage in a Tuesday statement said it aims to "restructure its balance sheet and significantly reduce its approximately $5.8 billion of outstanding debt to better position the company for long-term growth and profitability."

Chief executive Michael Hansen said the reorganization would "enhance our customer relationships and introduce innovative digital and print products and solutions" while implementing a "more appropriately sized capital structure."

The debtor has not yet filed a disclosure statement or Chapter 11 plan and said it would not need debtor-in-possession financing. On a restructuring website, Cengage said it would "work to finalize, obtain court approval for and implement a plan of reorganization as quickly as possible."

An ad hoc committee of first-lien lenders holding about $2 billion in debt has agreed to support a restructuring transaction.

Debtor counsel Jonathan S. Henes of Kirkland & Ellis LLP declined to comment on the case. Cengage, majority owned by PE firms Apax Partners LP and OMERS Private Equity Inc., had hired advisers in March to review its financial structure.

According to a March 20 statement, Cengage borrowed the amount remaining under its revolving credit facility, $430 million, to provide the company with "sufficient liquidity to fund its working capital needs."

Cengage had $490 million in cash on its balance sheet and owed $518 million on two revolvers as of March 21, the March 20 statement said. According to data provider Thomson Reuters Corp., the company's two revolvers are due July 5, 2013, and April 10, 2017. The revolvers are priced at Libor plus 275 basis points and Libor plus 400 basis points, respectively.

Standard & Poor's on March 21 downgraded the company's corporate credit rating to CCC- from CCC and said the outlook for the company was negative.

"The downgrade reflects the deterioration in the company's liquidity profile and performance, and our expectation that the company will likely default over the near term," S&P credit analyst Hal Diamond said in the report.

Cengage had a total of $5.8 billion in debt as of March 31. The company owed $725 million on its 11.5% senior secured first-lien notes due April 15, 2020, and $710 million on its 12% senior secured second-lien notes due June 30, 2019, according to the company's latest financial report for the quarter ended March 31.

In addition, the company owes $292.1 million on its 10.5% senior unsecured notes due Jan. 15, 2015; $132 million on its 13.25% senior subordinated discount notes due July 15, 2015; and $63.6 million on its 13.75% senior payment-in-kind notes due July 13, 2015, its financial report said.

The company also owes roughly $3.36 billion on three term loans and $518 million on two revolvers, the financial report said.

The company's revolver due in 2017 is subject to a springing maturity and will mature on April 5, 2014, if more than $400 million in principal is outstanding on its $1.53 billion term loan on April 5, 2014, the financial report said.

"Losing access to the revolver would further elevate default risk given the cash used for recent debt repurchases, and Cengage's reliance on the facility to cover its highly seasonal cash needs," Moody's Investors Service said in a Feb. 28 report.

Cengage, which publishes college textbooks and reference materials, and supplements its print publications with digital solutions, was acquired by Apax Partners and OMERS Capital Partners in a $7.75 billion leveraged buyout from Thomson Reuters on July 5, 2007.

A source who asked not to be named previously told The Deal Pipeline that Apax Partners has invested $1 billion in Cengage. The company listed assets of $4.68 billion and liabilities of $6.47 billion in its latest financial report.

Cengage reported a net loss of $2.12 billion on $1.3 billion in revenue for the nine months ended March 31. A year earlier, the company posted net income of $43.1 million on $1.49 billion in revenue.

Court papers did not address the root of Cengage's financial problems, but Hansen hinted at them during a May 10 conference call.

"Currently, our industry is in the midst of a shift to digital education and study materials," Hansen said. "This is being accompanied by significant pressure on the sales of traditional print materials."

Christopher Marcus and James H.M. Sprayregen of Kirkland & Ellis also are debtor counsel. Alvarez & Marsal LLC is Cengage's restructuring adviser, and David Kurtz, Timothy Pohl and Tyler Cowan of Lazard are its financial advisers.

Calls to Apax Partners and Lazard were not

Written by Pat Holohan in New York. Jamie Mason contributed to this report.

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