Aug. 24 (Bloomberg) -- Reader’s Digest Association Inc., publisher of the magazine that claims the largest paid circulation in the U.S., filed for bankruptcy protection with a plan to reduce $2.2 billion in debt by 75 percent.

Holders of more than 80 percent of the company’s senior secured debt agreed to support the Chapter 11 plan announced on Aug. 17, Reader’s Digest said today in a statement. All the Pleasantville, New York-based publisher’s U.S. businesses, including 47 affiliates, are filing for protection, it said today in a petition in U.S. Bankruptcy Court in White Plains, New York.

Under the reorganization plan, Reader’s Digest will reduce debt to $550 million and lenders led by JPMorgan Chase & Co. will take over the company. Ripplewood Holdings LLC and the buyers of Reader’s Digest in March 2007 for $1.6 billion will lose their investment.

“Our business operations remain solid, with anticipated fiscal 2009 revenue down only by low single digits,” Chief Executive Officer Mary Berner said in today’s statement. She said Aug. 17 in an interview that Reader’s Digest may emerge from bankruptcy in 45 to 90 days.

Seven senior lenders, led by JPMorgan and including Ares Management LLC and Eaton Vance Corp., will provide a $150 million debtor-in-possession loan that will convert into exit financing once the company leaves Chapter 11 protection, Kathy Fieweger, a company spokeswoman, said last week.

Fall in Advertising

The publishing company cited decreased consumer and advertising spending, along with a highly leveraged debt structure, as reasons for the bankruptcy filing.

Chief Financial Officer Thomas Williams, in a statement filed with the court, also said withdrawal of foreign credit lines and pressure from trade creditors hurt the company’s liquidity. There are about $90 million in pre-petition trade claims, Williams said.

Under the proposed plan, which needs approval by the bankruptcy court, lenders will swap $1.6 billion in debt for almost all of Reader’s Digest’s equity, with 7.5 percent of equity reserved for management and new directors. Holders of 9 percent notes due in 2017 will have the option to buy $50 million to $100 million in shares.

The notes traded at 2.5 cents on the dollar on Aug. 21, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

Foreign Operations

About 60 percent of the company’s revenue comes from foreign operations, including new editions of the flagship magazine in China, Romania, Serbia, Slovenia and Croatia, Williams said.

“Notwithstanding the current worldwide economic conditions, the debtors’ foreign businesses, as a whole, remain profitable and competitive,” Williams said.

The company is allowed to contribute up to $50 million of the proceeds from the bankruptcy loan to its foreign affiliates for working capital, according to court papers.

In addition to Reader’s Digest magazine, the company publishes “Every Day with Rachael Ray” and “Weekly Reader” and sells products such as the AB Circle Pro through its direct- marketing business.

The case is In Re: The Reader’s Digest Association Inc., 09-23529, U.S. District Court, Southern District of New York (White Plains).

To contact the reporters on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net; Christopher Scinta in New York bankruptcy court at cscinta@bloomberg.net.

Last Updated: August 24, 2009 10:36 EDT