Booking a Bankruptcy

Does Houghton Mifflin’s bankruptcy have a larger meaning?

Last week Houghton Mifflin Harcourt Publishing Company declared bankruptcy in the US District Court in Manhattan. The Boston-based publisher claimed that cutbacks in state and local education budgets meant that school districts around the country just weren’t buying textbooks fast enough for it to be able to service its debt. The bankruptcy comes as booksellers adjust to the advent of the Kindle and other eReaders.

The storied company has a long history, going back to 1832. They were Ralph Waldo Emerson’s publisher, and their titles include The Lord of the Rings, Curious George, and computer games like The Oregon Trail. But history is no guarantee of solvency. They listed $2.7 billion in assets and $3.5 billion in debt. Under the proposed plan, the company’s bonds would convert into equity, and existing shareholders would receive five-year warrants on the new shares, but nothing more.

The company has a 40% market-share of the K-12 educational publishing business, which isn’t going away. But net sales fell 14% last year amid budget cutbacks. In part, the company is a casualty of the Meredith Whitney thesis, as tight state and local budgets require cutbacks and deferrals. And the educational market, while steady, is not bomb-proof. Excessive leverage means that economic cycles can wipe out the equity of a company.

But the company isn’t going away. Under the new capital structure they will vigorously defend their market position, and they’ll have the flexibility to continue expand into digital content and international markets. Bankruptcy isn’t the end of the story.

Douglas R. Tengdin, CFA
Chief Investment Officer
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