HMV (LON:HMV) , the high street music and media retailer, said this morning that it had initiated discussions with its main lenders ahead of an expected covenant breach later this year. The news came as the group said that pre-tax profits were expected to fall slightly short of market expectations this year as challenging trading conditions continue. Full year net debt levels are expected to soar to not less than £130m – up from £67.6m in 2010 because of a combination of changes in product mix and other working capital movements.
In early January HMV reported that compliance with the financial year end covenants under its bank facility would be tight. While it has continued to meet the terms of those loans, the forecasts based on its full year expectations mean some of those conditions will not be met when they are tested by reference to the full year results.
HMV said the discussions with the banks were focused on potential changes to the facility agreement, which would ensure their appropriateness for future trading conditions and to support delivery of the group’s strategy. In the meantime, the group’s banking facilities remain fully available, the group’s lenders continue to be supportive and the group is maintaining a regular and constructive dialogue with them.
Last July, HMV refinanced a £240 million revolving credit facility with its existing group of eight banks. The facility is due to expire on 30 September 2013. The key terms and conditions of the facility, including the covenants and the margin on drawings, are currently LIBOR +2.25%.
Simon Fox, the chief executive of HMV, said: “Trading conditions remain tough, reflecting a difficult consumer environment as well 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.”