EMI battling to get debt restructuring – what are the implications

Posted on November 17, 2009


Terra Firma’s really been brought down to earth, in more ways than one: after failing to restructure EMI’s debt, it has written down about 90 percent of its investment in the struggling music label, reports FT. This comes after its lending bank Citigroup rejected the PE group’s efforts to get EMI’s debt reduced by 40 percent. Terra Firma had offered to inject about GBP1 billion of equity into the company in exchange for Citigroup forgiving a similar proportion of the GBP2.6 billion of debt it held, reports WSJ, but the bank said the offer was weighted too much towards the PE group keeping control. The size of this writedown does point out the great big obvious: that’s EMI has little more than option value, as FT puts it.  EMI, with Citgroup’s help, bought EMI at the height of the credit bubble for about 4 billion pounds.

Meanwhile, as a result of this, Terra Firma is also scaling back its day-to-day involvement with EMI: it is withdrawing about 10 of its executives that run EMI on a day-to-day basis, and focusing them on its other portfolio companies, WSJ says. It had about 40 executives working at EMI at the height of its involvement after its buyout two years ago.

Earlier this month, the label disclosed unverified cash flow of $286 million against a confirmed $5 billion debt load. So large is EMI’s debt that Terra Firma was forced last September to provide an “equity cure” of $23 million to satisfy covenant obligations.

Music industry observers believe that Terra Firma is going to have to provide another cash infusion in August to avoid breaching debt covenants when Maltby, the holding company that controls EMI, reports earnings.

Citigroup, which controls EMI’s $5 billion debt load, can push the label into bankruptcy if debt covenants are breached.



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