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Cengage Learning Files for Chapter 11 Bankruptcy

Cengage Learning Inc. filed for bankruptcy protection more than five years after a buyout led by Apax Partners LLP left the textbook publisher with about $5.8 billion in debt.

Under a deal with some of its senior lenders, the company will try to use the bankruptcy case to eliminate $4 billion in debt, Cengage said in a statement today.

“Our balance sheet is absolutely not fit for purpose, there is too much debt,” Chief Executive Officer Michael Hansen said today in a phone interview. “After we come out of this restructuring, we feel we’ll be in a very good position, with a very sound balance sheet, and a lot of room to continue to invest in the business.”

The company, which bills itself as the second-biggest publisher of college-course material in the U.S., listed more than $1 billion in assets in a filing today in U.S. Bankruptcy Court in Brooklyn, New York.

In 2007, private-equity group Apax led a $7.75 billion acquisition of Cengage from Thomson Reuters Corp. Apax is an investment adviser for funds worth more than $40 billion, the company said.

Apax has been buying Cengage’s debt at a discount, potentially giving the London-based company more influence during the restructuring.

Distressed Debt

Hedge funds that invest in distressed debt, including Centerbridge Partners LP and Oaktree Capital Group LLC, are part of a group of investors that holds more than $2 billion in Cengage senior debt, people familiar with the pre-bankruptcy talks said in June.

Other investors in the debt include GSO Capital Partners LP, BlackRock Inc. and Oak Hill Advisors LP, according to the people, who requested anonymity because the pre-bankruptcy process wasn’t public.

Cengage, with headquarters in Stamford, Connecticut, reported an 18 percent drop in sales for the six months ended Dec. 31.

Cengage develops teaching materials for colleges, schools, libraries and corporations, and provides print and electronic publishing. Hansen, who joined the publisher in September, has shifted to more digital products and subscriptions as students move away from buying new textbooks.

Biggest Creditors

In a list of its biggest unsecured creditors the company named Wilmington Trust, NA as agent for about $292 million in senior unsecured notes, Bank of Oklahoma as agent for about $132 million in senior subordinated, discounted notes and Wells Fargo Bank, NA as agent for $63.6 million in so-called payment-in-kind notes. The company also said it owed the Thomson Corporation $1.46 million for a tax indemnification.

Greg Mankiw, a Harvard University professor who advised Republican presidential candidate Mitt Romney is owed $1.6 million in royalties, according to the bankruptcy filing.

In the past, too much investment was directed to print at the expense of digital, Hansen said. Under new management, Cengage is focused “squarely on digital” and faculty and student users.

“The whole industry by and large has been a little bit guilty to not change quickly enough to the new paradigm; Cengage was certainly part of that,” Hansen said. “There was an underlying belief that the print model would hold up better than it actually did, particularly recently.”

Debt Pressure

Before it filed, Cengage faced mounting pressure to restructure its debt -- mostly from the 2007 leveraged buyout -- as payment deadlines loomed. Lenders were negotiating the company’s value and how to convert debt holdings into equity, the people said.

It has about $43 million in interest on a second-lien bond and a $222 million credit line due as soon as July 5, according to an earnings report and data compiled by Bloomberg.

The case is In re Cengage Learning Inc., 13-44106, U.S. Bankruptcy Court, Eastern District of New York, Brooklyn.

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