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Jul 17, 2009

Guy Hands should be so lucky: Neil Unmack

    By Neil Unmack
    LONDON, July 17 (Reuters) – Guy Hands got famous by working out ways to make pots of money out of the bond markets. Now he appears to be turning to them for a rescue financing for his struggling music company, EMI.
    The group, whose acts include Kylie Minogue and Iron Maiden, is struggling under debt taken on from its buyout, and Hands has already had to stump up cash to keep it from breaching covenants. A new high-yield bond could be part of the solution, but only if Hands and his bankers are prepared to take more pain. <For related news click [ID:nLH60373]>.
    The resurgence of the high yield market is one of the few examples of markets working well in tough times. Capital-starved banks are reining in lending and shunning leveraged loans, but at the same time low government bond yields are pulling yield-hungry investors into the bond markets. Companies such as Virgin Media <VMED.O> have already gone down the “loan to bond” route, refinancing or extending their debt.
    This panacea will only go so far. Leverage multiples for recent high-yield deals for non-cyclical companies have peaked at about five times earnings before interest, tax, depreciation and amortisation (EBITDA).
    The more cyclical EMI has approximately 2.4 billion pounds of debt, split between its recorded music and music publishing businesses.
    The troubled recorded music business had EBITDA of 163 million pounds in the year to March this year and 950 million pounds of debt. The music publishing business generated EBITDA of about 116 million pounds in the year ending March 2008 — EMI hasn’t released figures for this year.
    Put the two together and it’s very hard to see a high yield bond having much appeal without a significant cash injection by Hands and debt writedowns by his lenders, Citigroup Inc <C.N>.
    A more tailored restructuring and refinancing of the troubled recorded business section may work, perhaps combined with a sale of part of the music publishing business. While media prices are depressed, the recent partnership between KKR [KKR.UL] and Bertelsmann [BERT.UL] shows there is demand for music assets. 
    If EMI’s leverage can be sufficiently slashed, however unpleasant that may be, Hands may be able to persuade bond investors to finance the business: loss-making Warner Music Group <WMG.N> recently sold $1.1 billion of secured high-yield notes.
    But it won’t be a pain-free process. Bondholders would need to feel they are not being taken for a ride. The high-yield debt market in Europe is still relatively young and fragile. Investors will run for the hills if they sense they are being used as a dumping ground by private equity groups and their lenders.