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Rating Action:

MOODY'S HAS ASSIGNED A Baa3 RATING TO READER'S DIGEST'S PENDING $850 MILLION SENIOR SECURED TERM LOANS, AND DOWNGRADED THE UNSECURED SHELF REGISTRATION TO (P)Ba1

05 Apr 2002
MOODY'S HAS ASSIGNED A Baa3 RATING TO READER'S DIGEST'S PENDING $850 MILLION SENIOR SECURED TERM LOANS, AND DOWNGRADED THE UNSECURED SHELF REGISTRATION TO (P)Ba1

Approximately $1.4 Billion of Debt Securities Affected.

New York, April 05, 2002 -- Moody's Investors Service has assigned a Baa3 rating to Reader's Digest's pending $850 million senior secured term loans. The new facility will replace much of the existing facilities. In addition, Moody's downgraded the unsecured shelf registration to (P)Ba1. These actions conclude the review of the company's ratings which was initiated when it announced the acquisition of Reiman Holding Company for about $760 million in cash. The unsecured shelf is rated one notch below the secured credit facilities reflecting its weaker credit protections, both in the form of collateral and covenants. The rating outlook for all the above facilities is negative.

The rating is impacted by a significant increase in debt, relating to the debt financed acquisition of the assets of Reiman Holding Company, LLC, bringing expected pro-forma debt to operating cash flow to approximately 3.0x. The absolute level of debt and leverage is substantially higher than the company's historical range, and comes at a time when the company's core businesses have been adversely impacted by disruptions to mail order marketing, economic pressures, and weakness in its domestic books business. Moody's expects that management will be presented with integration challenges as the company seeks to absorb new operations and recognize synergies. Reiman will be Reader's single largest debt financed acquisition in the company's history.

Reiman has a combined circulation of 16 million readers in 10 million households across 12 titles that primarily target cooking, country living, and outdoor interests. Reiman generates approximately $300 million in revenue and $70 million in operating cash flow, indicating a purchase multiple of approximately 10x cash flow. Reiman's high operating margins are in part attributable to the fact that it relies largely on reader submitted content including recipes and tips in its magazines. The magazines generate substantially all of their revenues from circulation.

In addition to challenges presented by the acquisition, Reader's ratings are pressured by poor operating performance in fiscal 2001, ending June 30 2001, and Moody's expectations for fiscal 2002. The company's strategies for rebuilding the readership of its flagship magazine and expanding new product offerings to drive top line growth have been disrupted by the economic slowdown, anthrax fears, and increased interest in news content versus general interest and entertainment. Moody's expects that while some of the anomalous pressure experienced in the fall of calendar 2001 will subside, fully overcoming its effects will take time and skillful execution. In addition, Moody's remains concerned that longer-term erosion of readership may continue, particularly if management's attempts to attract a new younger subscriber base is not successful.

Moody's concerns are partially mitigated by Reader's Digest's large global magazine circulation base, a focused and profitable book publishing enterprise, its strong brand awareness, and successful cost cutting initiatives. Readers' Digest continues to be one of the best known brands in the world with more than one hundred million people using the company's products. The company is increasingly diversified both geographically, as international operations account for over 50% of operating profits, and along lines of business, as new businesses such as school fundraising, book fairs, and joint marketing ventures grow. Moody's is also comforted by management's efforts over the past several years to revive operating margins by eliminating over $400 million in expenses, and management's awareness of and efforts to address the company's longer term challenges.

The Reader's Digest Association, Inc. is a global publisher and direct marketer of products that inform, enrich, entertain and inspire people of all ages and cultures around the world. Revenues were $2.5 billion for the fiscal year ended June 30, 2001. Products include Readers Digest magazine, the most widely read magazine in the world, published in 19 languages, 48 editions and more than 60 countries. Global headquarters are located at Pleasantville, New York.

New York
Robert Konefal
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Glenn B. Eckert, CFA
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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