Apax’s Cengage files for Chapter 11

Apax doubled down on its investment, buying up debt in the publisher, but now faces increased losses.

Cengage Learning, an education textbook business owned by Apax Partners, has filed for Chapter 11 bankruptcy protection. 

Bought by the UK-headquartered firm and OMERS Private Equity in 2007 for $7.7 billion, the company was facing the prospect of refinancing $2.1 billion of its outstanding $5.8 billion debt load next year.

Now, through an agreement with a group of lenders who hold around $2 billion of first lien debt, it hopes to use the bankruptcy protection to eliminate $4 billion of debt from its balance sheet. 

“The decisive actions we are taking today will reduce our debt and improve our capital structure to support our long-term business strategy of transitioning from traditional print models to digital educational and research materials,” chief executive Michael Hansen said in a statement. 

Cengage, previously Thomson Learning, is the second largest educational publisher in the US. Despite efforts to turn around its business – which have included bringing in a new chief executive and boosting its digital offering –  the company has posted weak performance in recent years, registering an 18 percent fall in revenue in the 12 months to 31 December 2012. 

The filing comes a few months after it hired adviser Alvarez & Marsal to restructure its debt burden, in recognition that its cash flow position would not allow it to meet its near-term financial obligations. 

Cengage’s top unsecured creditors include the Willington Trust, with around $292 million, the Bank of Oklahoma with $132 million, and Wells Fargo with $64 million, according to a court filing. The company also owes around $1.5 million in tax indemnification to the Thomson Corporation, its former parent.

The bulk of the firm’s equity exposure to Cengage, totalling $757 million, is held in its €11.2 billion Fund VII, according to Apax LP presentation documents seen by sister publication Private Equity International

Apax also became a significant creditor to Cengage in recent months. In a move seen by insiders as an attempt to gain further clout in forthcoming restructurings, the firm bought $850 million in first lien debt in the group, and $425 million in junior debt, according to a company filing. 

It now risks compounding the loss of its equity investment in the business if its debt holdings are written down significantly, however. The firm has also drawn criticism in some quarters for investing in both the debt and equity of a portfolio company, as in some eyes that creates a significant conflict of interest. In the restructuring scenario in which the company now finds itself, it also muddies the waters when it comes to negotiating with other creditors.

Apax could not be reached for comment at press time.