Lenders throw financial lifeline to HMV

The group, which runs 266 HMV stores in the UK and Ireland, has secured a £220m banking facility covering the next two years, lifting uncertainty over its immediate future.

But the new package will see its lenders, including Lloyds Banking Group and Royal Bank of Scotland, issued with warrants worth 5 per cent of the company that can be converted into shares from next year.

And they have imposed tough lending terms, including an interest rate of 4 per cent above current market rates and an exit fee of 14 per cent in relation to a £90m portion of the facility if it has not been repaid by January 2013.

Kate Calvert, an analyst at Seymour Pierce stockbrokers, said the terms of the agreement showed the banks “clearly have the company over a barrel”.

The facility has been reduced from an existing £240m package after the banks demanded that some of the £53m from the recent proposed sale of the Waterstone’s book shop chain is used to reduce its debt.

The agreement is dependent on HMV completing the Waterstone’s sale to Russian billionaire Alexander Mamut at a shareholder meeting on June 23.

And reflecting pressure on HMV to pay down its debts, no dividends will be offered to shareholders until the £90m slice of the loan has been repaid.

Simon Fox, HMV’s chief executive, said the new banking facility was another important milestone in securing the financial stability of the group, which has issued four profit warnings in recent months.

HMV has struggled to counter falling sales of CDs and DVDs as more consumers shop online and supermarkets compete for business.

The group hopes to revive its fortunes by selling more gadgets such as iPads and iPods and by growing its ticketing and festival business. It has been encouraged by the performance of six trial stores using the technology-led format and wants to convert another 150 shops to the new format by the autumn.

HMV said current trading was in line with its last update, when it revealed that like-for-like sales at its UK and Ireland stores fell by 18.8 per cent in the 17 weeks to the end of April.