EMI parent seeking cash to avoid default

LOS ANGELES -- The private equity firm that bought the recording label of the Beatles and Coldplay needs more cash from investors to avoid a possible foreclosure by Citigroup Inc.

The problems for British financier Guy Hands were detailed in a report that was audited by KPMG and released Thursday. Hands' private equity firm, Terra Firma, bought EMI Group PLC through a separate company, Maltby Capital Ltd., for $3.8 billion in 2007.

Maltby directors said in the report the company needs to raise money by June 14 or risk defaulting on its loans. Maltby said it may require more than $165 million to last through this year.

Maltby had $6 billion of debt as of last March, mostly owed to Citigroup.

Representatives for Terra Firma and Citigroup declined to comment on the report.

The source of the problem is EMI Music, a division of EMI that makes money by selling recordings of new and established artists.

Cash flow from the unit must exceed a certain percentage of net debt each quarter. Despite a revival helped by cost-cutting, it failed that test in four of the last six quarters since September 2008.

A rerelease of the Beatles' albums last fall helped it pass in September and will likely help it pass the December test. But it is expected to fail the test again March 31 because the terms of the loan make the ratio gradually more difficult to meet.

The unit's cash flow rose 52 percent to $250 million in the year to March 2009.

Although Maltby has $15 million available to inject to provide a so-called "cure" for substandard cash flow, "any further equity cure or injection of further funds would have to be made using additional funds provided by the shareholders," the report said.

Maltby and EMI are now preparing a revised strategic business plan to provide to Terra Firma investors along with a request for more cash, the report said.

If funds can't be raised and the loan goes into default, Citigroup could seize EMI and cause it to be sold or broken up.

Warner Music Group Corp.'s $4.2 billion bid for EMI in 2007 was rejected in favor of what was then a $4.9 billion bid by Terra Firma.

Because of the decline in CD sales, Warner is not likely to value EMI nearly as highly today and Warner CEO Edgar Bronfman Jr. said in August he would only work together with EMI "if it makes good business sense."