Maltby Capital Limited, the vehicle Guy Hands used to acquire EMI for £4.2bn shortly before the credit markets collapsed a couple of years ago, has filed results and financial statements for the year to March 31, 2009.
And it does not make for comfortable reading.
From Reuters:
EMI GROUP REPORTS YEAR TO END-MARCH 09 LOSS FROM OPERATIONS OF 1.03 BLN STG VS 22 MLN STG PROFIT
EMI GROUP SAYS LIKELY WILL BE SIGNIFICANT SHORTFALL AGAINST BANK COVENANTS AT MAR. 31, 2010
EMI GROUP SAYS IN TALKS WITH GROUP’S SHAREHOLDERS FOR ADDITIONAL FUNDING
We have not had time to go through the full document, but a number of things immediately stand out.
First is £1bn impairment charge.
Second is that accountants KPMG have added an ‘Emphasis of Matter’ paragraph to the results with the chilling lines; “these conditions, along with the other matters explained in note 1 to the financial statements, indicated the existence of a material uncertainty which may cast significant doubt on the Group’s ability to continue as a going concern”.
KPMG points out Maltby/EMI made a net loss of £1.56bn during the year ended 2009, and, at that date, the Group’s liabilities exceeded its current assets by £408m.
The auditor goes on to say that EMI’s ability to continue as a going concern is dependent upon the availability of existing banking facilities, which require the Group to meet certain covenants.
To that end, Maltby says that based on “current forecasts” there is likely to be a significant “shortfall” when the banking covenants are tested at the end of March 2010, and that without an equity injection they are unlikely to be met.
As such, EMI has started discussions with its shareholders. Now here’s the good news (such as it is) – EMI shareholders have agreed to provide further funding subject to the provision and approval of a “revised” business plan.
However, this had not been signed off and the clock is ticking.
Updates and hopefully some analysis to follow.
Full EMI/Maltby results statement in the usual place.
In the meantime, here’s a random pic of Katy Perry and Guy Hands.
Guy’s on the left.
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Update: Further observations from the Financial Statements.
In order to avoid breaching quarterly covenants between September 2008 and September 2009, Guy Hands’ Terra Firma was forced to inject £105m EMI. It now has less than £10m left for future payments.
According to the statement the amount of cash it will need to inject into the business over the next financial year to avoid breaking quarterly covenants will be significantly more than £105m. Hands must come up with the money by June 14 or risk losing the company to its lender, Citigroup. (Remember that Terra Firma is suing Citi over its role in the EMI auction).
Now, all of which chimes with Thursday’s story in the FT.
Guy Hands will have to ask investors in his Terra Firma private equity group to inject about another £100m after admitting that EMI’s recorded music business will not be able to meet the terms of its loans from Citigroup this year, according to people familiar with its accounts.
The accounts show that EMI Music will fall far short of critical covenants on its debt when these are tested between March and December this year and could suffer further shortfalls next year. The news sets the stage for a dramatic test of investors’ faith in Mr Hands, who paid £4.2bn for EMI just before debt markets collapsed.
But the problems don’t end there. The cash injection will only provide Hands with a year’s breathing space. In the statement, Maltby says it expects to breach covenants in 2010/11 unless it finds more cash.
From the financial statements:
“The directors also recognise that existing forecasts indicate a significant shortfall in respect Of the covenant test period to end March 2011 and that, notwithstanding the provision (if agreed) of equity cure funding as currently under discussion with shareholders, if this position remains unchanged over the next twelve months, the directors would be facing the same issues as are described above in respect of the financial covenants to be tested as at that time.”
And if that weren’t enough the statement also reveals the possibility that investors might have to inject a separate sum of £10m to £200m to fund its pension scheme.
The Group is currently engaged with the Trustee of the EMI Group Pension Fund regarding the cash contributions under the scheme funding regime. To date, the Trustee and the Group have not been able to reach agreement regarding a long-term funding and investment policy for the Fund.
As a result, the Pensions Regulator has become involved in the process. The final outcome of this process is unknown at this stage.
Absent agreement between the Group and the Trustee, this process is not likely to be resolved until March 2010 at the earliest. Proposals put forward by the Group, on which agreement was not reached, targeted a deficit in the order of £10 million to £200 million based on a valuation at 31 March 2008.
Should contributions to remove any deficit in the Fund be required prior to the expiry of the Group’s existing banking facilities, the directors consider that, absent agreement from the lender, funding for these contributions, which would be likely to be spread over a number of years, will need to be met by additional funds from the shareholders. There is no certainty that such funds will be available.
Back to the financials.
Excluding an impairment charge of £1.03bn and restructuring costs of £126m, EMI recorded a profit from operations of £143m in the year ended March 31, 2009. EBITDA (excluding restructuring charges) was £293m on revenue of £1.58bn.
So the performance of the business under Hands has actually been pretty good, however, it is the debt that is killing him. That and the fact he overpaid – by around £1bn (which is also the size of the impairment charge).
During 2009, interest payable on bank overdrafts and loans was £223m and there was £56m of interest payable on a £346m ‘shareholder’ loan from Guy Hands’ Terra Firma. (In addition there was interest payable on defined benefit pension scheme liabilities of £57m).
In August 2007, EMI signed three debt facility agreements: a £1.175bn senior debt facility, a £1.41bn securitised bridge facility and a £155m mezzanine facility, all of which are repayable after five years or more, according to the statement.
The shareholder loan mentioned above was provided in year ended March 31, 2008 by Terra Firma Capital Partners II and III at a fixed interest rate of 8 per cent (with the option to added interest to the principle). It is repayable in August 2017. However, in June 2008, the interest rate on this loan was cut to 0 per cent, again demonstrating the support Hands had had to give to EMI.
Total borrowing at EMI (including obligations under financial leases) stood at £3.55bn at the end of March 2009. The bridge facility and the mezz facility had both been drawn drawn down and only £258m of the £1.17bn senior facility remained.
Related links:
Hands v Wormsley (or Terra Infirma) - FT Alphaville
Hands in cash call for EMI shortfall – FT
EMI Records £1.5 Billion Loss – Kleinman
Terra Firma / EMI – Lex