HMV Group Plc (HMV), the U.K.’s biggest CD and DVD retailer, said it agreed a two-year, 220 million-pound ($360 million) refinancing plan that will allow lenders to take a 5 percent share of the company.
The lenders will be granted warrants in HMV in an agreement that provides “financial stability,” the Maidenhead, England- based company said in a statement on Regulatory News Service.
HMV agreed last month to sell its Waterstone’s bookshop chain to Russian billionaire Alexander Mamut to satisfy bankers over a July 2 debt covenant deadline. Net debt at the April year-end was 170 million pounds, or almost four times HMV’s market value.
“While a positive event in terms of providing stability and allowing management focus to return to operations, we fear this is an interim pause before the next step down,” wrote John Stevenson, an analyst with Peel Hunt who has a “hold” rating on the stock.
Fees are structured to provide an incentive for early repayment, so HMV may struggle to earn enough to repay in time, he said.
An exit fee equal to 5 percent a year grows to 8 percent on April 1, 2012, and 14 percent on Jan. 1, 2013, if the 90 million-pound term loan B isn’t repaid, according to the statement. Additionally, HMV may not pay a dividend while this loan tranche is outstanding.
Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc (RBS) are participating in the plan, according to two people familiar with the deal who declined to be identified because the terms aren’t public. Sky News yesterday said Banco Santander SA (SAN) also arranged the financing. Santander spokesman Peter Greiff did not immediately reply to an e-mail seeking comment.
The financing is split between two term loans of 70 million pounds and 90 million pounds, and a 60 million-pound revolving credit facility, HMV said. All are due to mature in September 2013 and pay interest of 4 percent more than the London interbank offered rate.
HMV fell as much as 16 percent. It closed 1.75 pence, or 14 percent, lower at 10.5 pence at 4:30 p.m. in London. The shares have dropped 67 percent so far this year, giving the company a market value of 45 million pounds.
Yesterday HMV rose the most since it held an initial public offering in May 2002 after the Sunday Times said the refinancing agreement was close.
Nick Bubb, an analyst with Arden Partners, said higher interest charges may wipe out any earnings before interest and tax this fiscal year. Current trading “remains very poor,” he wrote in a note to investors. He has a “reduce” recommendation on the company.
HMV said today its business hasn’t changed from May 20, when it said sales at stores open at least a year dropped 12 percent in the 17 weeks ended April 30, excluding live music revenue. Sales at HMV outlets declined more than those at Waterstone’s book outlets.
HMV is seeking to focus on live music and digital sales to counter the drop in CD and DVD revenue. It’s also trying to sell more devices such as Apple Inc. (AAPL)’s iPods and iPads in stores.
“We are very pleased to have concluded the new bank facility, which represents another important milestone in securing the financial stability of the group,” Chief Executive Officer Simon Fox said in the statement.
The revised plan, through Sept. 30, 2013, replaces an existing 240 million-pound funding arrangement, the company said.
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