EMI confident it will not default on Citigroup loans

EMI, the music label whose artists include Lily Allen and Coldplay, moved to calm fears that it was in trouble yesterday as insiders denied it could default on its £2.7bn loans early next year.

The group, bought by private equity company Terra Firma for £2.4bn in 2007, angrily denied suggestions that it needed more cash to avoid breaching covenants in three months.

Terra Firma, run by Guy Hands, has a covenant check scheduled for March but sources on both sides are confident that EMI will not default on the loans made by its banker Citigroup.

One source close to the private equity company categorically denied the rumours, adding that internal forecasts predict the company will generate enough cash to avoid going cap in hand to its owners.

"EMI had a solid first half, and if performance continues in the same way then there is no reason why it should run into problems. The covenant light facility has seven years to go, and March is nothing more than a covenant test," he said.

There is an expectation in the market that a series of companies bought by private equity in highly leveraged deals will need to be restructured or face breaching covenants.

EMI has long been rumoured as a deal that could be under threat, and in September Terra Firma had to inject between £65m and £75m to avoid a potential default.

However, banking sources remain confident over EMI's ability to pay, adding that at the time of the investment three months ago it had raised "a fair amount of equity in excess of what it needed at the time".

The EMI buyout was sealed at the height of the credit bubble, and the subsequent onset of the crunch and the collapse of the debt market hit the bank's plans to offload its debt and Terra Firm's desire to bring in other equity investors.

Mr Hands has set about turning the group around through operational changes. He slashed costs through a total of 2,000 redundancies, while a series of unprofitable artists were cut from its labels. There has been progress at the group, which turned around losses of £45.1m in the three months to June 2007 to post £59.2m earnings in the corresponding period this year.