Struggling entertainment media and hardware seller HMV has been given a bit of breathing space by its bankers and suppliers.
The group said the banking syndicate has has agreed to amend the covenant package on HMV's existing borrowings, after the group secured the support of key suppliers, albeit at a price.
Just 11 days before the group was due to face a covenant test on its loans, it has persuaded its lenders to waive the test.
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The bankers have also agreed to re-set tests relating to the 12-month periods ending April and July 2012 with significantly enhanced head-room.
Translating that into everyday English, the bankers have given HMV more time to sort out its debt problems and made it easier for HMV to hit targets which, if missed, would trigger the recall of the loans.
Suppliers take an interest
The banking group has done this in response to a change in the nature of HMV's relationships with its key music and film suppliers, which includes the intended grant of warrants representing 2.5% of its equity to these suppliers, HMV said. A warrant is a type of security that is linked to a company's ordinary shares, and which entitles the holder to buy the linked shares at a fixed price on or before a specific deadline.
Issuing warrants to suppliers is a canny way of motivating those suppliers to keep HMV in business, because if the company goes belly-up, the warrants become worthless; conversely, if HMV shares rise sufficiently then the warrant holders will be able to buy HMV shares at below the prevailing market price. If all the warrants are exercised, the suppliers would hold a 2.5% equity stake in HMV.
If everything goes to plan - and not much has, of late, for HMV - the group expects to slash its debt in half over the next three years, even without selling any more parts of the business. The group recently said that it was looking for buyers for its live entertainment arm - just about the only part of the company that is growing.
Another month, another profit warning
Good news though the deal is for HMV shareholders, there was a fly in the ointment in the form of another profit warning. With trading conditions expected to remain tough, the group believes it is now likely to deliver a slightly larger loss than previously indicate of around £10m for the full year to April 30th. HMV expects net debt to be £175m-£180m at the end of April 2012.
Market consensus for the current financial year is for a loss before tax of £2.9m, but things have been moving so fast at HMV of late that it is probable that investment analysts have not had time to fully update their forecasts.
"These developments represent a material improvement in our financial position relative to the statement we made at the time of our interim results," Chief Executive Simon Fox said.
"The new relationship with our suppliers and the support of our banks will now enable HMV to wholeheartedly focus all of its energies - working in close partnership with its suppliers, on serving the changing needs of its customers ever more effectively. As a key part of this we remain committed to improving our specialist ranging and merchandising of music and DVD whilst also continuing to grow our sales in portable technology and further developing our online and digital offers," Fox added.
David Joseph, Chairman and Chief Exeuctive Oficer of Universal Music UK, one of HMV's suppliers, said his company was looking forward to continuing its relationship with HMV in the years ahead.
"HMV is a vital part of the UK music industry and we are delighted that the support of the film studios and music companies is helping to secure its future," Joseph said.
The shares more than doubled on the announcement, but are still down by around four-fifths over the last year.
