August 25, 2014

Cengage Creditors Sign Off on Pre-Negotiated Bankruptcy

Cengage Learning reached an agreement with an ad hoc committee of first lien lenders to reduce approximately $4 billion of the company’s $5.8 billion of outstanding debt, the company announced yesterday. In conjunction with the deal, and as the company announced it might in May, Cengage and its domestic, wholly owned subsidiaries filed voluntary petitions for Chapter 11 in the Bankruptcy Court for the Eastern District of New York. (Cengage’s non-U.S. subsidiaries are not included in the filings and “will continue to operate in the ordinary course without interruption,” the company said in a statement.)

Among the points in the complex agreement: subject to the court’s approval, the secured creditors will each receive a pro-rated share of the new equity, the new debt, and excess cash. (The debtors plan to come out of bankruptcy with fewer than 2,000 holders of new equity and fewer than 500 holders of new equity that are not “accredited investors,” so as not to be subject to the reporting requirements of the Securities Exchange Act.) Unsecured creditors will be paid on a pro-rated basis from what’s left, according to a “priority waterfall.” The agreement also provides for a new term loan of up to $1.5 billion and a new first-out revolving credit agreement of no less than $250 million and up to $400 million. A percentage of new equity equal to $75 million is allocated for the implementation of a market-level management and director equity incentive program.

In addition to several banks and technology companies, the list of major creditors that signed off on the agreement also includes printers, publishers, and book wholesalers well known to the publishing industry, such as RR Donnelley, The Thomson Corporation, The National Geographic Society, Pearson Education Australia, and more.

Michael Hansen, CEO of Cengage, told LJ, that, given the lender agreement, the court’s approval of the company’s restructuring “should be pretty quick, but one thing I’ve learned is, never make too precise predictions.” Hansen said he would hope the process would be complete within this calendar year, but “I just don’t want to jinx it.”

The transaction is expected to be largely a non-event for others doing business with Cengage. The company has permission from the lenders to keep using cash flow from operations to fund the business, and expects to keep paying vendors, authors’ royalties, and employees on schedule. (Since Cengage has substantial cash balances—a vendor Frequently Asked Questions document estimates the company’s liquidity at approximately $280 million—and expects to generate positive cash flow, it does not need debtor-in-possession financing.) The company plans to keep delivering orders in full, is not planning to renegotiate any customer contracts except as they expire as usual, and is continuing to launch new products. Gale, a Cengage subsidiary, is continuing to archive its content with Portico.

According to Hansen, who took over about eight months ago, “the reason there was a problem is that our owner, Apax, significantly overpaid six years ago, and therefore put too much debt on the business.” A private equity group led by Apax Partners bought Cengage from Thomson Reuters in 2007 for $7.75 billion. (Apax also bought about $800 million of the company’s debt over the past year at a discount, according to DowJones, which would give it a greater say in the restructuring.)

In practice, Apax said it would agree to the terms proposed, with one addition: that the creditors have an option to exchange the equity they’d get in the reorganized company for debt issued to other creditors, and vice versa. Creditors wanting to participate in the swap would have to commit to how much equity they’d want to swap (or what price in debt they’d be willing to sell for) by the date ballots are due. Equity offers would be filled starting at the lowest sale price until either they were all filled or all the offered money was used up. No equity buyer would be allowed to own more than 35 percent of the reorganized company.

CengageProductMixShifttoDigital1 Cengage Creditors Sign Off on Pre Negotiated BankruptcySeparate from his debt reduction efforts, Hansen has also been working “to fix the business issues and set the company on a path to success” by focusing on digital product development, user experience, and changing the company’s “go-to-market approach” with its sales force. Those efforts started about six months ago, and while the company’s 12-18 month product development cycle means they’re not yet completed, Hansen told LJ “we are pretty much on plan.” As part of the filings, the plan itself, which would normally be kept confidential, is now available online. In it, one can see the profits inherent in the switch to digital are driven by greater rates of student adoption as well as a greater dollar value realized per student, in spite of a slightly cheaper net price.

Though the business portion of the restructuring did involve layoffs earlier this year—in March, the company reported $12.7 million in operational restructuring charges “comprised of employee severance and other costs”—Hansen told LJ the company does not anticipate any further layoffs as a result of the bankruptcy. “It is completely focused on the balance sheet, not on the operations,” he said. “We have taken those actions that we needed to take for the operational turnaround already.”

At the recent American Library Association (ALA) Annual conference in Chicago, Frank Menchaca, executive vice president, research solutions for Cengage, told  LJ, “I was not asked to cut one head. In fact I’m adding senior leadership.” He added, “We’re putting out more products than ever before. Nothing is going away. I think about [the bankruptcy] maybe 1.5 percent of the time. I have other things to do. My role is to make sure Gale [one of Cengage’s subsidiaries] continues to be a successful company.”

 

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Meredith Schwartz About Meredith Schwartz

Meredith Schwartz (mschwartz@mediasourceinc.com) is Senior Editor, News and Features of Library Journal.

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Comments

  1. Mary Ann Lamanna says:

    A Cengage author, I received a letter today, as did come other authors I know, saying that royalties on work going forward would be paid, but that the bankruptcy agreement did not permit paying royalties for sales prior to July 2, 2013. That means I do NOT get the royalties due me Sept. 30, 2013 for sales of my textbook from Jan. 1, 2013 through June 30, 2013.

    The letter can be found on http://www.cengage.com/restructuring click on “authors”

    The letter said that Cengage is/will apply to the court for permission to pay those royalties, and hopes to hear in a couple of weeks.

    My point, though, is that the statement that Cengage will pay royalties is incorrect at this point.

    Mary Ann Lamanna
    Professor Emerita of Sociology
    University of Nebraska at Omaha
    6001 Dodge St.
    Omaha, NE 68182-0291
    mlamanna@unomaha.edu

    • Roberta C Weiss says:

      I am a Cengage/Delmar author too, and also have royalties due me the end of August, which covers payment from February to August.

      I also submitted a new edition of my text and had a contract indicating that I would be paid a separate “grant” fee at the submission of my manuscript, which by the way, I turned in 2 weeks early!

      Now I have no idea if I will ever get paid my royalties or my grant, as my sales and my grant both fall under the “prior to July 2, 2013″ issue.

      Not a good way to treat your authors who have made you sooooooooooo much money.

  2. I’m still trying to get my head around a publishing house having$5.8 billion in debt. I know lots of business types are blithering idiots, but I really can’t imagine a publishing house having $5.8 billion in debt.

  3. Holger Ehling says:

    So, according to Mr Hansen, everything is hunky-dory at Cengage, Mr Menchaca is hiring senior executives, the company puts money together to “incentivise” staffthe and running costs can be paid either out of cash flow or the $280m in liquid cash.
    So what the hell is a court doing to allow Chapter 11?
    This is clearly a measure to bail out not Cengage but Apax, whose debt raised in purchasing the company is now being paid off by authors, printers and other suppliers. Did I hear anyone saying “this stinks”?

  4. David in Adelphi says:

    I’m a freelance editor for Cengage, on contract. I’ve not been paid since May, and they now owe me more than $7500. My primary income is derived from my freelance work for clients such as Cengage, and unfortunately, this has hit me as the sequester has hit my contractor for government publishing. The consequences of both these events happening nearly the same time? If the Cengage doesn’t send me a check within a week, I’ll be looking at filing bankruptcy myself. I’ve had to live on my credit card for a couple of months now, and the credit card just turned off my credit because I’m late making a payment. The hardships caused by the kind of financial playground the big financiers engage in is ridiculous. I am one of the many journalists who have been laid off from staff jobs in journalism in the past few years, while executives and VPs, Assistant VPs, and Presidents and CEOs or publishing corporations are earning record profits. I hope the publishing business gets the act together soon, but I’m not hopeful.

  5. “The company has permission from the lenders to keep using cash flow from operations to fund the business, and expects to keep paying vendors, authors’ royalties, and employees on schedule.”

    This is not correct. Instructors for Education to Go were not paid their royalties this month and there have been no communications from Cengage about when these will be paid.

  6. JustInTime says:

    I am not surprised there has been no communication about the Pre-Petition payments from the leaders at Cengage Learning. Sounds to me like they took advantage of the authors working for them to get free services.
    Hopefully, since they have money to continue operations, the courts will decide to make those payments. Otherwise, Cengage is going to lose a lot of good content and author relationships.

  7. Craig Smith says:

    I am a bankruptcy attorney. Not involved in this case other than representing an author. If you have an open contract with Cengage, you hold an “executory contract.” Cengage has the right to assume or reject your contracts. You should anticipate it assuming profitable contracts. IF it assumes your contract, then it has to “Cure” (pay) your arrearages, as it cannot hold your contract going forward without paying for it. There is always disruption at time of filing a large Chapter 11.
    It is not uncommon for post Petition fees to be delayed a bit, but generally, the money on Post Petition royalties should start flowing on a regular basis. They are correct, until the Plan is confirmed, they cannot pay PRE-Petition Royalties on Assumed Contracts.

    FILE YOUR PROOF OF CLAIM before the OCT 31 Deadline, particularly if you think the current amount listed as owed is too low.