HMV's bank masters give it more time
The retailer has two more years, but lenders have it 'over a barrel' and the pressure is on
Wednesday 08 June 2011
HMV, the troubled entertainment retailer, has safeguarded its immediate future by agreeing a new £220m, two-year bank facility with its lenders. But one City analyst warned that the banks now had HMV "over a barrel".
Questions have also been raised about the group's ability to repay or renegotiate its debt mountain by 30 September 2013, and over the exorbitant "exit fees" attached to the loans. On the shop floor, the scale of HMV's problems was laid bare by its current UK trading, which it said had continued "in line" with the slump of 15.1 per cent over the 17 weeks to the year end on 30 April.
Under the terms of the new facility, HMV's lending consortium – including the taxpayer-backed Lloyds Banking Group and Royal Bank of Scotland – are to be given warrants equal to 5 per cent of the group's shares, which they will be able to convert after 30 June 2012.
The new facility is also subject to HMV selling its Waterstone's book chain to Alexander Mamut, the Russian billionaire, for £53m. But the refinancing gives HMV critical breathing space to try to turn around its performance.
Simon Fox, the chief executive of HMV, said the new bank facility "represents another important milestone in securing the financial stability of the group". He added: "It has been a very tough and long journey. The banks have always been pretty supportive." The group's recovery will be tied to delivering more revenues from technology products, digital, live music and its ticketing business.
On the financial side, HMV has agreed a £220m banking facility which replaces its existing £240m arrangement. This comprises two loans of £70m and £90m, as well as a £60m working capital facility, which all have a final maturity date of 30 September 2013. HMV will pay an interest rate of 4 percentage points over Libor, the rate at which banks lend to each other. But the exit fees, or charges levied on repayment, on the £90m loan are clearly designed to push HMV into repaying early.
The exit fees start at 5 per cent a year but rise to 8 per cent on 1 April 2012 and then jump again to 14 per cent on 1 January 2013 – if the £90m loan has not been repaid.
Sanjay Vidyarthi, an analyst at Espírito Santo Investment Bank, said: "The exit terms are a real sting in the tail and a sign the banks want their money back as soon as possible." Piling on the misery for investors, HMV will not be able to pay a dividend while this loan is outstanding. In fact, the deal appears to have been structured in the hope that the 266-store chain – whose net debt ballooned to £170m at the end of April – will deliver successful Christmas trading, which would enable it to start repaying its debt.
Nick Bubb, an analyst at Arden Partners, believes that if HMV has a good Christmas, a rights issue next year would be "highly likely". He added: "A rights issue could be a way of really ensuring survival in the medium term as opposed to the short term."
Certainly, Mr Fox was bullish about HMV's trial in six stores of increased space for technology products, including headphones, speaker docks and tablet devices, which will now be rolled out to 150 shops by the end of the autumn. This is vital to combat the long-term decline in sales of DVDs and CDs.
He said: "The results have been extremely strong. We have seen our technology sales increase by 150 per cent and we have seen the overall store performance improve asa result."
For its 2009-10 financial year, technology products delivered sales of £85m – equal to 6 per cent of HMV UK's total. But the market is already populated by, among others, Currys, Comet and Best Buy, as well as the supermarkets. "They have latched on to a market that appears to be as crowded as the CD and DVD market they are distancing themselves from," Mr Bubb said.
HMV's recovery will also depend on growing its live music division, which covers 12 concert venues and the six music festivals it operates, its ticketing business and online. But a defiant Mr Fox said he was "absolutely" sticking with his prediction in March that it will still have hundreds of stores in five years' time. He said. "We will have to transform the business and change but I believe there is a role for an entertainment specialist on the high street."
Can HMV make it? What the analysts say
Kate Calvert, SeymourPierce
"The banks clearly have the company over abarrel, which is not surprising given that current trading remains in line with the 17 weeks to 30 April. We are maintaining our sell recommendation as we continue to believe that the business is a value trap and the Waterstone's deal is expected to be dilutive to earnings."
Sanjay Vidyarthi, Espírito Santo
"As things stand, we remain unconvinced that increasing space in store for technology products will be sufficient to offset the pressures on core entertainment and we will need convincing on the online strategy in particular before we can be more positive on the investment case. We have not learned enough yet that HMV is through the worst... It [refinancing ] gives them a lifeline."
John Stevenson, Peel Hunt
"We would still expect store closures to run deeper than the 60 stores currently flagged. While the shares have reacted well in anticipation of today's news, we would continue to avoid the stock, with the speed of market change likely to continue to outpace HMV's strategy."
Nick Bubb, Arden Partners
"Against the odds, HMV has survived in the short term on the hopes of a successful switch to selling 'technology', but this seems to us to be a triumph of hope over experience and we would be surprised if the good results from the first six stores can be replicated in a wider roll-out. The banks and management are gambling that this move to technology will really work. One year ago, they said the move into clothing would work and that has been a dismal failure."
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