Debt-laden Cengage in hunt for new chief

Cengage is searching for a new chief executive with digital experience to lead an eventual initial public offering, the educational publisher said as it announced an agreement to refinance part of its $5.7bn of debt.

David Shaffer plans to retire as chairman in September when Ron Dunn will step up from being chief executive to the role of executive chairman for at least another three years.

The board was in the “advanced stages” of a search for a new chief, Mr Dunn told the Financial Times on Thursday, adding that he was “completely confident” that it would announce details of his successor “within a few weeks”. Cengage competes in education with Pearson, owner of the Financial Times.

The change of leadership was triggered by the recognition that an IPO would take “a while”, Mr Dunn said, and investors would want to see a chief executive in place who planned to stay with the company for some time afterwards. “I’m 65-years-old,” he said. “Continuity will be important to investors.”

Cengage said it had refinanced $710m of senior notes, extending the time it had to repay the debt from 2015 to 2019 in return to agreeing to a higher interest rate of 12 per cent, compared to the 10.5 per cent it had been paying.

“This is designed to give us time to get to the IPO and have the major refinancing of debt then,” Mr Dunn said. “The interest rate will be a little bit higher but it’s all accommodated within our cash flow projections.”

Moody’s, the credit rating agency, downgraded Cengage on Friday from B3 to Caa1, citing heightened concern that it could engage in discounted debt repurchases as it looks to address another $2.8bn of borrowings maturing in 2014 and 2015.

The outlook for the rating is negative, Moody’s said, cautioning that further refinancings could result in higher cash interest costs exceeding Cengage’s free cash flow.

MR Dunn said that Cengage could not control the timing of the IPO, adding: “Some recent events have not necessarily been favourable in terms of how robust the IPO market is.” The fall in Facebook’s shares after its high-profile Nasdaq listing has scarred some investors, and market volatility has made IPO candidates more nervous.

The refinancing was Cengage’s second in three months. In April it said it had extended the maturity date on $1.3bn of term loans. Mr Dunn said it would next look to extend the terms of about $450m of bonds yielding 10.5 per cent that are among those due to mature in 2015.

Cengage’s $5.7bn total debt, which compared to revenues of $1.8bn in its last financial year, is the legacy of the 2007 buyout by Apax and Omers Capital Partners of the former Thomson Learning from Thomson Corp of Canada. Mr Dunn said Cengage’s investors remained patient and supportive.

Cengage was likely to appoint a chief executive from outside the company with digital skills, he said. “We’re looking for someone who’s made or at least participated in the digital transition. The business is going to be in transition for some time, but the pace has accelerated in the last 18 months or two years.”