EMI's debt 'stable,' CEO says

Leoni-Sceti sends e-mail to staff about financial state

NASHVILLE -- EMI's debt to Citigroup offers "an extremely stable and flexible financial structure," according to an internal e-mail from chief executive Elio Leoni-Sceti sent to all EMI Music staffers and obtained by Billboard.

The e-mail, apparently intended to quell fears and rumors about the company's financial health, was sent Thursday after the Wall Street Journal published an article about Terra Firma's latest infusion of equity into EMI (called an "equity cure").

EMI's debt with Citigroup, explained Leoni-Sceti, is what is often called covenant-lite. This means the debt carries with it flexibility in dealing with deviations from agreed-upon covenants.

The frequency of covenant-lite deals soared between 2005 and 2007 -- the year Terra Firma acquired EMI -- due to the high amounts of liquidity in credit markets. The availability of credit reduced the power lenders had over borrowers and their ability to intervene when covenants are not met. Critics warn that these deals may be harmful because they prolong lenders' ability to intervene at the earliest signs of trouble.

In some cases, a covenant-lite deal will allow the debtor to add equity to the company in order to meet a certain loan covenant. For example, a loan may carry with it a requirement of a certain debt to EBITDA ratio. If the company does not achieve that ratio, it is allowed to infuse equity into the company to count as EBITDA, thereby meeting the covenant and averting a breach of the deal. EMI's memo provides no details on the specifics of EMI's debt to Citi and which covenant the equity infusion impacted, but it does say the equity came from a fund set up for Maltby/EMI specifically for this kind of need.

The email follows:

From: Internal Communication
Sent: Friday, May 29, 2009 10:34 AM
To: All EMI Music Staff
Subject: REPORTS ON EMI MUSIC'S FINANCES - from Elio Leoni-Sceti

Dear all

Over the past couple of days, there have been some misleading and inaccurate media reports about EMI's financial position. You may receive questions from artists and business partners.

The facts are as follows:

EMI's financial structure

EMI has an extremely stable and flexible financial structure. Our debt, which is provided by Citigroup, is what is known as 'covenant-lite', in other words there are no traditional covenants.

Normal corporate loans have covenants - if a company breaches them, the lender automatically takes control of the assets. Instead, under Terra Firma's agreement with Citigroup, we have some financial ratios that we are tested on at certain dates. If those ratios are not met at the required times, our holding company Maltby injects small amounts of additional investment capital which are called 'equity cures'.

Those equity cures were expected and are provided for. They come out of a fund that Terra Firma established for Maltby/EMI nearly two years ago in the full knowledge that as we transformed the business, there would be a need for some additional investment capital. In the last financial year, we were on budget with our equity cures.

EMI Music's financial performance

Thanks to your skill and hard work, EMI Music is delivering strong growth in operating profits and cash flow, and we have maintained market share - despite being in a period of major reorganization. That period is now behind us, and we are looking forward to an exciting new chapter as we roll out our consumer-focused strategy designed to provide the best service to artists and customers.

I hope this will help you to answer any questions arising from the recent reports.

All the best