March 4 (Bloomberg) -- Reader’s Digest Association Inc., the closely held magazine publisher, hired law firm Kirkland & Ellis LLP to explore restructuring options including a possible bankruptcy filing, a person familiar with the situation said.

The law firm was asked to evaluate options for the Pleasantville, New York-based publisher that include a possible “pre-packaged” or “pre-arranged bankruptcy,” in which much of the restructuring work is completed out of court, the person said. A pre-packaged bankruptcy is more advanced than a pre- arranged bankruptcy as it already has agreements from creditors about the outcome of a reorganization.

Reader’s Digest, first published in 1922, has offices in 45 countries and publishes 92 magazines. It operates 65 Web sites and sells 68 million books and music or video products every year, according to its Web site. The company was bought for $2.4 billion in March 2007 by a group of investors led by Ripplewood Holdings LLC, and merged with Ripplewood portfolio company WRC Media Inc. and Direct Holdings U.S. Corp.

The company’s restructuring could take “a number of different forms: an out of court restructuring, an in-court restructuring, or a debt buyback,” said John Puchalla, a Moody’s analyst who covers Reader’s Digest. Puchalla added that the company has flexibility on its covenants with lenders.

William Adler, a Reader’s Digest spokesman, declined to comment. Kate Kortenkamp, a Kirkland spokeswoman, didn’t return calls seeking comment.

Credit Opinion

Moody’s said in a credit opinion Feb. 18 that Reader’s Digest’s capital structure appears “unsustainable” and may violate its covenants or restructure within the next year to 18 months. The company faces pressure on cash flow from declining demand for its print-based products and a drop in consumer spending, the ratings firm said. The company also has a high debt-to-EBITDA ratio, Moody’s said.

Reader’s Digest announced Jan. 28 it would eliminate about 8 percent of its 3,500 employees worldwide, citing a drop in consumer spending and magazine advertising in most markets. Reader’s Digest also said at the time it would require U.S. workers to take five days of unpaid time off in each of its 2009 and 2010 fiscal years, and suspend matching contributions to 401k retirement plans.

Reader’s Digest is the latest in a series of publishing or media companies to explore the possibility of restructuring. Companies that have recently filed for bankruptcy include Quebecor World Inc., a printer of books and magazines, and newspapers publishers including the Philadelphia Inquirer, the Journal Register Co., Tribune Co. and the Minneapolis Star Tribune. All cited the rise of Internet publishing and decline in advertising.

$600 Million

Reader’s Digest’s $600 million in 9 percent notes due 2017 most recently traded at 9 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Their 52-week high was 60.75 cents on the dollar, hit Sept. 4.

JPMorgan Chase & Co., Citigroup Inc., Merrill Lynch & Co. and Royal Bank of Scotland Group Plc syndicated a $1.61 billion loan package in February 2007 to back the $17-per share LBO by Ripplewood, according to a Feb. 27 report from Standard & Poor’s. S&P said the loan was split between a $1.31 billion term loan and $300 million in revolving credit.

At the end of 2008, $206 million was outstanding under the revolving credit, S&P said.

To contact the reporter on this story: Tiffany Kary in New York Bankruptcy Court at tkary@bloomberg.net.

Last Updated: March 4, 2009 00:01 EST