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HMV suppliers denied credit insurance

By | Published on Wednesday 19 January 2011


Some suppliers to HMV have been denied credit insurance for the stocks they provide to the retailer, amid mounting concerns in City circles regarding the music and entertainment firm’s ability to meet bank loan covenants. This means that if HMV were to default on payment for stock already received, or worse was to go out of business, suppliers wouldn’t be able to claim monies lost from their insurers.

This latest development follows those disappointing pre-Christmas sales figures reported by the HMV Group at the start of the year, and the news that the company will close 40 of its HMV stores and 20 more Waterstones shops in 2011.

We know HMV has in the region of £150 million in debts, a bunch of which were run up as the company diversified its operations through acquisition in recent years. Top man Simon Fox has admitted that meeting financial performance targets demanded by those loan agreements is going to be “tight” this financial year, and that fact is probably behind the withdrawal of credit insurance.

If HMV failed to meet the terms of the covenants it has with its bank, the money lenders could withdraw the retailer’s loan facility, though more likely they would demand higher interest and fees on the entertainment firm’s debts. Neither is ideal.

In practical terms, a change in credit insurance status of this kind could result in suppliers refusing to supply stock to the retailer without payment upfront, a development that could cripple the company. That said, HMV insisted yesterday that it had not experienced any problems in getting supplies this month.

There is, of course, a lot of goodwill for HMV amongst the entertainment industry, with key players recognising that the retailer is now their only high street route to consumers. Few will want to stop their goods from being available via that route, and none will want to instigate a policy that could jeopardise the future of such an important sales channel.

That said, no one likes taking on extra risk, and reports suggest that distributors are already looking to the record companies and DVD and games publishers to guarantee any revenues that they might lose if HMV did go bad.

The latest development in HMV’s woes comes as The Hut Group, which powers the online entertainment mail-order operations for various retailers, including Tesco, Asda, Argos and WH Smiths, revealed that its comparable sales for 2010 were up 57% on the previous year. Rival online entertainment retailers Amazon and are also expected to announce record sales for the festive period in 2010.

Of course, ten years ago HMV screwed up its online strategy, missing the small window of opportunity that existed to take a significant share of the online entertainment retail market, allowing newcomers Apple to dominate in digital and Amazon and in mail-order.

The latter benefit, of course, from the infamous VAT dodge, whereby they set up a base on the Channel Islands and then get away without charging VAT on CDs and DVDs under £18 thanks to an idiotic loophole in tax laws. This means online retailers can undercut high street stores by 20% without affecting their profit margin.

Of course, rather than lobbying to close the loophole that gave its new rivals such an unfair advantage, HMV decided to join the VAT dodge party itself with its own mail-order website (albeit, they claim, reluctantly). But is a small player in the online entertainment retail market, while the HMV high street business struggles to compete with the VAT-free prices charged online by Amazon and et al.

Opinions remain mixed about HMV’s future. There is still a lot of value in the HMV brand and at least certain strands of its business. However, until those loan covenants are met in March, both City and entertainment industry types will continue to look on nervously.