Cengage Learning to exit bankruptcy protection

March 2014 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

Textbook publisher Cengage Learning Inc announced in early February that the company had reached an agreement with its major creditors that will enable it to significantly reduce its debt. The debt deal goes a long way to smoothing Cengage’s exit from Chapter 11 bankruptcy protection.

In a statement Cengage noted that the agreement will remove $4bn of its outstanding debt of around $5.8bn. According to the company the revised plan also incorporates a global settlement between Cengage and holders of a super-majority of the company’s first lien, second lien and unsecured debt, its existing primary equity holder and the Official Committee of Unsecured Creditors. Due to this agreement being reached, Cengage has secured support for the reorganisation from all of its key creditor groups. Although at the time of writing the settlement still required court approval, Cengage tentatively hopes to exit bankruptcy on 31 March.

Stamford, Connecticut based Cengage filed for bankruptcy protection in July 2013 citing its enormous debt load as a catalyst. The majority of the company’s debt was accumulated as a direct result of a leveraged buyout of Cengage by private equity firms Apax Partners LLP and Omers Private Equity in 2007 from Thomson Reuters Corp for around $7.75bn. Apax’s ownership of Cengage will be expunged by the reorganisation plan, yet the firm will still retain some equity in the restructured company. This retention is a result of the first-lien debt position that Apax acquired in 2013.

Apax expressed its disapproval of a provision in Cengage’s initial reorganisation plan which stipulated that there would be delays in distribution to Apax if any of the other creditors objected to any of its claims until such a time that their protests were resolved. The decision by Apax to acquire $850m in first lien obligations, which it had purchased on the open market before Cengage entered bankruptcy, entitled the firm to distribution under the plan along with the other first lien lenders and note holders. A number of other entities – including Searchlight Capital Partners, KKR & Co, Oaktree Capital Management, Oak Hill Advisors, BlackRock Financial Management Inc and Franklin Mutual Advisers LLC – will have their first lien stakes converted into equity in Cengage under the new reorganisation plan.

Under the terms of the debt agreement, not only will Cengage eliminate the majority of its debt but the company has also arranged exit financing of between $1.75bn and $2bn. Around $250m of that financing will take the form of an undrawn revolving credit facility upon the company’s completion of its financial restructuring. Cengage’s current first lien lenders will receive a substantial majority of the equity of the reorganised company and second lien creditors and unsecured creditors will share in $225m in cash or stock based on a total enterprise value of $3.6bn.

In a statement announcing the debt agreement, Michael Hansen, Cengage’s chief executive, said “We are pleased to have reached this agreement and gained the support of all of Cengage Learning’s most significant creditors for our plan of reorganisation, giving us a clear path to the successful completion of our financial restructuring. Under the plan, Cengage Learning will have a new capital structure with a substantially stronger balance sheet and greater financial flexibility to accelerate our growth. We are excited about the opportunities resulting from the ongoing transformation of our business to digital products and services and the high-quality educational content we are providing to our users and customers.”

In November, Cengage revamped its original reorganisation plan to include $111.9m in escrow for unsecured creditors. However this revision to the plan caused a number of the company’s unsecured creditors to protest, claiming that the amount made available may be less than the value of certain copyrights that they were fighting over with senior lenders.

Richard Summerfield