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HMV admits it is likely to breach loan covenants

By | Published on Wednesday 2 March 2011

HMV

HMV issued its fourth profit warning in six months yesterday, and then admitted it is likely to fail loan covenant tests next month and announced its chairman was standing down. Well, might as well get all the doom and gloom out in one go, I guess.

Of course, it is no secret that the struggling retailer and entertainment group is having a bad time of it, and earlier this year top man Simon Fox announced plans to shut 40 HMV stores and 20 more Waterstones shops in a bid to cut costs. Yesterday, the firm admitted trading conditions “remained challenging” and as a result year-end profits were likely to be in the region of £45 million, or “moderately below market expectations”.

£45 million might sound alright given the current state of the wider retail sector, but the real issue for HMV, of course, isn’t its profits but its debts. The retail firm borrowed millions to fund Fox’s diversification plan in recent years, which involved buying into companies like 7Digital and taking ownership of the MAMA Group. And while said diversification policy may have been sensible, it’s the level of debt it created that is now causing Fox his biggest challenges.

As usual those loans come with covenants that stipulate HMV should perform at a certain level financially, and Fox recently admitted that meeting those covenants this year was going to be “tight”. Yesterday the company admitted meeting those covenants this year was going to be pretty much impossible.

This doesn’t come as a huge surprise, we already knew HMV was in talks with its money lenders about restructuring its debts and rewriting those covenants – and that the lenders had called in advisers to review the situation on their behalf – but the City nevertheless responded with an air of gloom to yesterday’s announcements.

It didn’t help that HMV also admitted that its debt levels remained considerably higher than many had assumed, and then announced that its chairman – the main liaison point between Fox and his investors – was quitting.

Former banker Robert Swannell said he didn’t have enough time to be HMV’s chairman any more, possibly because the rising doom and gloom means it’s an ever more demanding job, or possibly because he recently took on the same role at Marks & Spencer. Swannell will stay on the HMV board though, while fellow board member Philip Rowley will take up his former position.

Fox continued to put a positive spin on the situation, telling reporters: “Trading conditions remain tough reflecting a difficult consumer environment as well as the changing markets in which we operate. However, our business is adapting quickly to respond to these external factors, and we are confident that our plans will ensure its long-term and sustainable future”.

Nevertheless, you can see why the reported offer by Russian businessman Alexander Mamut to buy the slightly more successful but still flagging Waterstones business from HMV is now getting serious consideration from Fox’s team, despite them previously saying they had no interest in offloading assets.



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