I see posts on here all the time lamenting PE ownership, made without any understanding of how we got to this point, and how this goes all the way back to asinine decisions pre-bankruptcy in 2013. I’ve decided to play Cengage historian and lay some of this out for posterity, and so I can yell at the sky
2012–2013: Debt pile gets ugly
• Pre-bankruptcy: Before Chapter 11, Cengage was already doing financial engineering just to push out maturities — e.g., in 2012 it sold $725M of 11.5% senior secured notes due 2020 and amended its credit facilities to extend term loan and revolver maturities.
• July 2, 2013: Cengage files for Chapter 11 with about $5.8B of outstanding debt, announcing a “pre-arranged” restructuring to eliminate more than $4B of that.
Even before bankruptcy, they were in the classic LBO textbook-publisher trap: lots of high-coupon debt, some of it maturing in big lumps, and a business that’s not exactly a rocket ship.
2014: Emerges from Chapter 11… still leveraged
• April 1, 2014: Cengage officially emerges from Chapter 11. The plan cuts ~$4B of funded debt and brings in $1.75B of new Term Loan B financing, plus a $250M asset-based revolver, as exit financing.
• Post-reorg, they’re no longer at $5.8B of debt, but they do still have roughly ~$1.8–2B of funded debt sitting above a business doing around ~$2B of revenue at the time, still pretty leveraged.
That Term Loan B is key. By design, those loans usually have tiny quarterly amortization and then a big “bullet” (lump-sum) repayment at maturity. You drag a big principal balance for years, paying interest the whole time, then face a huge refinancing/repayment cliff at the end.
2014–2019: Term loan era, dividend recaps, and financial engineering
• In the years after emergence, Cengage spends a lot of time tweaking the capital structure: repricing the term loan, issuing additional term debt, and even doing share-repurchase and dividend recap transactions (they literally disclosed a “dividend recapitalization” in FY2015 current reports).
• if you’re still doing buybacks / dividends and refinancing loans rather than aggressively paying them down, you’re implicitly betting that refinancing the big bullet at the end of the term will be doable when you get there.
So by late 2010s you’ve got a company that did cut its original $5.8B anchor, but is still sitting on a large secured term loan and reliant on capital markets to roll that over when maturities and balloon payments come due.
2019–2020: Aborted McGraw-Hill merger, more uncertainty
• In 2019 Cengage announces a planned merger with McGraw-Hill and a related amendment to its senior secured credit facilities, again, capital structure is clearly front-and-center.
• The merger is ultimately called off in 2020 after regulatory issues, which leaves Cengage still independent, still carrying its own debt stack, and now without the scale/merger synergies that were supposed to help.
So by early 2020s, you’ve got: meaningful secured debt, a term-loan structure with big future maturities, and no merger “escape hatch.”
2021–2022: Rising rates + debt drag
• For FY22 (year ended March 31, 2022), Cengage reports adjusted cash revenue of about $1.37B and Adjusted Cash EBITDA less prepub of ~$326M.
• That’s a decent EBITDA number, but on top of a large term loan it still implies a non-trivial leverage ratio. As global rates move up and credit spreads widen (2022–2023), the cost of keeping that debt financed goes up, and the risk of refinancing a big bullet at attractive rates gets worse.
The company itself starts talking more about “financial flexibility” and de-leveraging in investor materials around this time… they know the balance sheet is constraining what they can do.
April 2023: Apollo preferred equity to prevent collapse
• April 17, 2023: Cengage announces that Apollo Funds will invest $500M into a new series of convertible preferred stock
• In the press release, Cengage explicitly says it will use the proceeds to “reduce outstanding debt and lower interest expense,” and to “increase financial flexibility” to invest in growth.
The old LBO-style debt and its balloon risk were getting harder and more expensive to carry in a higher-rate world. Rather than wait for a ugly refinancing fight when the big maturities hit, they sold a chunk of the company to Apollo via preferred equity, then used that cash to pay down loans and push the maturity wall further out.
2023–2025: PE priorities, “efficiency,” and repeated layoffs
Once Apollo is in, the priorities shift to the usual PE playbook:
• Sharpen the focus on EBITDA, cash flow and “portfolio mix
• Cuts, cuts, cuts
A classic pattern of a ZombieCo:
- Heavy term-loan/balloon-style post-bankruptcy debt +
- Rising interest rates and a tougher refi environment
- Need to de-risk the maturity wall with Apollo preferred equity
- Apollo-style mandate to improve profitability and reallocate capital
- Repeated restructuring and headcount reductions