Reader’s Digest and friends are in serious pain. Will their prescription work?

Even in Pleasantville, the news gets bleaker by the quarter. Back in the fall, the Reader's Digest Association, the publishing and direct-marketing behemoth based in the Westchester County hamlet, posted an operating loss of $337 million for fiscal 2008. After a steady stream of credit-rating downgrades, Moody's placed the company on "The Bottom Rung"—its list of companies most likely to default on their debt. And earlier this month, Bloomberg reported that RDA had retained Kirkland & Ellis' bankruptcy practice to "explore" restructuring options, including bankruptcy.

President and CEO Mary Berner, who's been at RDA's helm ever since the company's leveraged buyout two years ago, tossed a bucket of cold water on the bankruptcy rumors. In a memo to the media, she wrote that the company was moving forward with a hard-times "Recession Plan" but promised that any bankruptcy talk was balderdash. "We continue to meet our debt covenants," she soothed, "and in no way are we in default under our financing arrangements."

That's probably temporary. Under the terms of its loans, the company must meet progressively more stringent conditions to demonstrate its ability to pay down debt, with one hurdle in June and another a year later. With revenue falling, the owners of Reader's Digest have a strong shot at meeting their June number through wrenching budget cuts. But even from a distance, 2010 isn't looking good: Despite aggressively reducing its costs, the company's debt has recently traded as low as 7.5 cents on the dollar.

"The noose is tightening," says Moody's media analyst John Puchalla.

For years, RDA was known to be a foundering operation. In 2007, when the company was sold for $2.4 billion to a group led by Ripplewood Holdings LLC—a private-equity firm best known for its turnaround of Japan's Shinsei Bank earlier in the decade—that foundering operation became saddled with enormous debt. Its tab with creditors has now reached its highest level ever, a princely $2.1 billion. Last year, the company's interest payments alone were $160 million.

But while other publishers are heaving their losing titles overboard during the storm, RDA is doing the unthinkable: It continues to launch new magazines. Last month, the company premiered Fresh Home, a quarterly shelter mag aimed at DIY-minded couples, and in the coming months, RDA will debut Best You, a health-and-lifestyle glossy for fortyish women. Conventional wisdom says that the belt-tightening mood of the day is toxic for such a launch; Meredith's Country Home went under this year, promptly followed to the crypt by Condé Nast's home magazine Domino. Berner seems to be betting that, like RDA's bright spot Every Day With Rachael Ray, her budget-minded new magazines can defy the odds.