Music and book retailer, the HMV Group today announced that they had negotiated a £220million refinancing deal with their lenders, which is likely to give the company a lifeline.
Analysts have criticised the move, claiming that the onerous repayment terms are likely to wipe out any profitability for the next two to three years.
HMV shares initially rallied by 10 per cent after the news, but closed 14 per cent down after the actual costs involved became involved.
HMVs shares have already fallen by 80 per cent in the last year, as its become obvious the firm was struggling after profit warnings and increased online competition.
£90million of HMVs debt will now be labelled “Facility B” and will be subject to huge exit fees costing as much as 14% of the loan amount if it is not repaid by January 2013.
HMV revealed that they were still trading around 15% behind last year, which analysts have taken a as a sign that repaying the loan early will be impossible, and they predicted that the interest charges, which will be between £10 and £15 million a year, will wipe out any profits made.
Retail analyst from UBS, Adam Cochrane added, “There is no longer an immediate liquidity issue, but there is clearly a profitability issue on a three-year view.”
Adam added that the debt transaction was “one of the more complex I’ve seen in the retail sector”, before adding, “Sales continue to be weak, so it’s likely HMV will incur some of these punitive interest charges, and that will probably eat away a large chunk of its profits. The return on capital expenditure will struggle to be greater than the cost of finance, suggesting the banks want to see further disposals.”
The refinancing rests on shareholders voting through the £53million sale of Waterstone’s to Alexander Mumut, a Russian tycoon.