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February 3, 2014 6:23 pm
Cengage Learning, the 2007 Apax-led buyout that became a symbol of the excessive borrowing taken on in deals struck before the global financial crisis, has reached an agreement with its many creditors, paving the way for it to emerge from bankruptcy protection next month.
The sparring over the indebted US education company had been closely watched in private equity circles, both because it was the largest private equity-owned company to file for protection from creditors in recent years and because of controversy over Apax’s role in buying so much of its debt.
In the agreement announced on Monday in New York, creditors finally agreed that Apax should be allowed to convert its debt into equity. Some creditors had previously challenged Apax’s debt purchases, arguing that its rights should be subordinate to those of other lenders.
Junior creditors will receive $225m in stock and cash as part of the agreement, reflecting their ability to hold up a settlement. They had more bargaining power than was originally evident because Cengage had not fully secured collateral including copyrights and some cash, giving the junior creditors extraordinary claims.
Cengage, which competes in education with Pearson, owner of the Financial Times, had struggled with new digital competition and a vibrant second hand college textbook market. The interest burden on its debt load sapped its ability to invest.
The plan eliminates $4bn of the company’s $5.8bn in debt, leaving Cengage with healthy cash flows once freed of its interest burden. The company’s total enterprise value is set at $3.6bn or less than half the value of Apax’s $7.75bn buyout.
Leading debt investors including Apollo, the GSO arm of Blackstone, Centerbridge, KKR, Oaktree Capital Management, and Searchlight bought debt at sharp discounts to its face value both before and after the filing.
“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,” Michael Hansen, Cengage’s chief executive, said.
A new board is expected to take shape in the coming weeks with many of its members coming from the distressed debt firms.
Apax declined to comment.
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