Cengage Learning files for Chapter 11 bankruptcy protection

August 2013 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

Cengage Learning Inc and all of its domestic US subsidiaries filed for Chapter 11 bankruptcy protection on 2 July. Cengage applied for bankruptcy protection after reaching a restructuring agreement with a number of its creditors which would reduce the company’s outstanding debt by over $4bn. Cengage’s non-US subsidiaries will continue to operate normally, and are not included in the bankruptcy filing.

The company, a leading educational content, software and services company for the academic professional and library markets worldwide, also entered into a restructuring support agreement with a number of first lien creditors who hold approximately $2bn of the company’s outstanding debt. Michael Hansen, chief executive officer of Cengage, said “The decisive actions we are taking today will reduce our debt and improve our capital structure to support our long-term business strategy of transitioning from traditional print models to digital educational and research materials.”

At the time of writing the company’s debt restructuring plan still requires court approval, as well as the endorsement of a number of additional creditors. Under the terms of the proposed plan, senior creditors would exchange debt for an ownership stake in the newly restructured Cengage. They would also receive some cash from the company according to court documents.

Cengage, the second biggest publisher of college course material in the US, reported more than $1bn in assets in its filing at the US Bankruptcy Court in Brooklyn, New York. The company’s bankruptcy comes less than five years after Cengage was bought out by private equity firm Apax Partners LLP and the Ontario Municipal Employees Retirement System. At the height of the pre financial crisis leveraged buyout frenzy, the firms paid Thomson Reuters Corp a total of $7.75bn for Cengage, with Apax contributing over $750m of its own equity to the deal. Following completion of the deal, an unmanageable debt pile of $5.8bn was placed upon Cengage’s balance sheet.

Among the company’s biggest unsecured creditors, Cengage lists Wilmington Trust, NA as agent for about $292m in senior unsecured notes, the Bank of Oklahoma as agent for about $132m in senior subordinated, discounted notes and Wells Fargo Bank, NA as agent for $63.6m in ‘payment in kind’ notes. The company also reported that it owed the Thomson Corporation $1.46m for a tax indemnification.

Before Cengage filed for Chapter 11 protection, the company was beginning to face increasing pressure to restructure its outstanding debt as payment deadlines loomed. Indeed, Cengage was facing a $225m debt payment on 5 July and the maturity of $2.1bn in term loans in 2014. Cengage also owes around $43m in interest on a second lien bond. Hedge funds including Centerbridge Partners LP and Oaktree Capital Group LLC are also believed to be in a group of investors that hold over $2bn in Cengage senior debt.

However, despite these substantial debts, according to the company’s statement Cengage maintains considerable cash balances and expects to continue to generate positive cash flow. Therefore Cengage feels that it will not be in need of debtor in possession (DIP) financing during the restructuring process. Equally, the company expects to be able to provide employees with their usual pay and benefits. Cengage has agreed a deal with its creditors which will allow it to continue using cash flow from its operations to “fund its business and meet obligations in the normal course during the restructuring process”.

Cengage, headquartered in Stamford, Connecticut, reported an 18 percent drop in sales for the six months ended 31 December. Due to declining sales the company has begun to focus the majority of its attention on digital products and subscriptions. Regarding the shift in emphasis, according to Cengage’s chief executive Michael Hansen, “The whole industry by and large has been a little bit guilty to not change quickly enough to the new paradigm; Cengage was certainly part of that. There was an underlying belief that the print model would hold up better than it actually did, particularly recently.”

Richard Summerfield