Cengage Declares Bankruptcy as Expected

Cengage has submitted a per-arranged bankruptcy filing which will wipe $4Billion in debt off its balance sheet and in the process enable them to "better position the company for long term growth" according to their press release.  The wipe-out leaves the company with approximately $1.8Billion in debt but it will be the crippling debt payments, loan requirements and covenants that will do most to free up the company to do what the private equity investors said they would do in the first place which is to push the company into producing more digital and on-line products.

The company has been aggressively re-populating its' executive suite and under Michael Hansen who joined as CEO from Elsevier last year, the company now has an almost entirely new executive management team.  It would be expected that this new team will have more flexibility in developing new products and expanding their Cengage MindTap (which still sounds like a medical procedure) products.  When the original Apax led private equity deal was done, there were promises made that Cengage would begin to haul back the advantages that Pearson and McGrawHill had built up in their respective investments in digital learning; however, reality bites, and the debt coupled with a fast slow down in the education market conspired against them.  It is likely that insiders at the company knew this day was inevitable at least two or three years ago as the market slowed and their cash flow became less buoyant.  That's only to imply that the market did not grow sufficiently to match their projections and allow them space to grow the business.

Perhaps this is finally the end of stupid publisher ticks with debt.

Here is the Cengage press release and the text is below:

Stamford, CT – July 2, 2013 – Cengage Learning, Inc., a leading educational content, software and services company for the academic, professional and library markets worldwide, announced today an agreement with certain of its lenders 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. In order to implement the financial restructuring, Cengage Learning and all of its domestic wholly‐owned subsidiaries have filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Eastern District of New York.

In conjunction with the Chapter 11 filing, Cengage Learning entered into a restructuring support agreement with an ad hoc committee of first lien lenders who hold approximately $2 billion of the Company’s first lien debt. In this agreement, the lenders committed to support a restructuring transaction that will eliminate more than $4 billion in debt from Cengage Learning’s balance sheet and position the Company to implement management’s strategic business plan.

Cengage Learning maintains substantial cash balances and expects to generate positive cash flow, and therefore does not need nor intend to obtain debtor‐in‐possession (DIP) financing. In addition, the Company has reached an agreement with its secured lenders that permits it to continue to use cash flow from operations to continue to fund the business and meet obligations in the normal course during the restructuring process.

Michael Hansen, Chief Executive Officer of Cengage Learning, 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. Cengage Learning began an operational transformation six months ago under the leadership of our new senior management team, which is executing bold plans to enhance our customer relationships and introduce innovative digital and print products and solutions to meet our customers’ evolving needs.

“A more appropriately‐sized capital structure, along with our established product lines, leading market positions and strong customer relationships, will position us well to accelerate our growth and take advantage of business opportunities in the education and research space. We are grateful for the support of our key financial stakeholders for our business plan and restructuring. We will continue normal business operations, with no expected disruptions to our relationships with our employees, customers, business partners, or vendors. Our customers can be confident that they will continue to receive the same high quality content, products and industry leading services and support they are accustomed to without interruption,” concluded Mr. Hansen.

Cengage Learning plans to make timely payment to vendors for goods and services provided to the Company during its restructuring in the normal course of business. It is anticipated that employees will continue to receive their usual pay and health and welfare benefits.

Cengage Learning has filed customary “First Day Motions” with the Bankruptcy Court, which, if granted, will help ensure a smooth transition to Chapter 11 without business disruption and will minimize impact on its employees, customers, authors, content providers, business partners, vendors and suppliers. The motions are expected to be addressed promptly by the Court. Cengage Learning plans to make timely payment to vendors for goods and services provided to the Company during its restructuring in the normal course of business. The Company fully anticipates that employees will continue to receive their usual pay and health and welfare benefits and is confident that the Court will approve its request to do so.