HMV buys some breathing space with £220m refinancing

Lloyds and RBS agree to extend HMV's facility for two more years. But with little sign of the company bouncing back, it's not totally clear why...

by James Taylor
Last Updated: 06 Nov 2012
HMV lives to fight another day: Lloyds and RBS have just granted the struggling retailer a new £220m loan facility for the next two years, in a deal that will see the state-backed banks end up with a 5% stake in the company. Presumably they decided that the loan (and more significantly, the loan fee) was worth the risk to prevent HMV running out of money. But it's hard to be optimistic about HMV's future prospects: sales are down 15% year-on-year, and with profits likely to slide to less than £30m this year, it's not easy to see how it's going to pay this money back...

HMV needed to refinance its loan because it was about to breach the covenants on its old £240m facility. And it really didn't need another headache like that after a traumatic few months in which it has issued a string of profit warnings and been forced (by the banks) to sell bookseller Waterstone's for £53m to help pay down some of its debt. So today's deal is, at least in part, good news: the interest charges (of 4% over LIBOR) are not disastrous, and it gets a bit more breathing space to roll out its latest turnaround strategy.

The big question, though, is whether this new strategy will be any more successful than the previous ones. HMV seems to be pinning all its hopes on selling more technology stuff: a trial in six stores has apparently delivered promising results, and it now plans to roll out the idea to another 150 shops in the coming months. But even if this wasn't a terrible time to be trying to engineer a high street revival, this is hardly an under-served segment of the retail market. Unless it finds a way to offer something special and different, HMV will surely have to shed a substantial number of its 730 stores.

Equally, although the retailer has bought itself a bit more time, its lenders are not exactly writing a blank cheque. £90m of this loan is structured in such a way that HMV has a huge incentive to pay it back fast - from 5% this year, the interest rate ratchets up to 8% in 2012 and then 13% in 2013. With trading not improving since April (when like-for-likes were down 15%, pushing the full-year profit forecast down to £28.5m) it's hard to see how it could possibly pay this money back even in two years' time - unless it taps investors for more cash, and at the moment it's hard to see anyone seeing this as an attractive option. Is this refinancing just going to delay the inevitable?

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