Struggling entertainment retailer HMV secured its immediate future with a £220-million ($359.8-million U.S.) refinancing deal that will effectively involve the British taxpayer taking a stake in the group.
Shares in the 90-year-old retailer, which has issued four profit warnings this year, rose 14 per cent on Tuesday after it said it had agreed a loan package with lenders led by state-backed Lloyds Banking Group and Royal Bank of Scotland.
In addition to a weak economy, HMV, which employs 13,000 staff, is battling intense competition from supermarkets and internet retailers as well as the fast-growing popularity of digital downloading of music and books.
A survey on Tuesday showed that British retail sales fell unexpectedly in May as low wage growth and high inflation forced consumers to rein in spending.
The firm, famous for its Nipper the dog trademark, has been shifting its emphasis from fast-declining CD and DVD markets into the growth markets of new technology products, live music and event ticketing. It is closing 60 stores and cutting costs.
The banking syndicate agreed the refinancing after HMV last month secured the sale of its Waterstone's book chain to Russian billionaire Alexander Mamut, pledging to use the £53-million proceeds to cut debt of £170-million.
The £220-million loans package, which matures in September 2013, replaces an existing £240-million facility and comprises two term loans of £70-million and £90 million and a revolving credit facility of £60 million.
HMV will have to pay interest at 4 per cent over LIBOR as well as exit fees and is prevented from paying dividends.
Analysts said although the interest charges could have been higher, the firm still faces an uncertain future.
"There are fees to consider and HMV may not be able to prevent a further working capital outflow in 2011/2012. We still expect the higher interest charge to wipe out any EBIT (earnings before interest and tax) this year," said Arden Partners analyst Nick Bubb.
Warrants will be issued to the lending banks representing 5 per cent of the firm's total issued share capital when converted into shares after June 30, 2012.
The British government ended up with stakes of about 83 per cent in RBS and about 41 per cent in Lloyds after bailing out both banks with billions of pounds worth of taxpayers' money during the financial crisis.
"We are very pleased to have concluded the new bank facility, which represents another important milestone in securing the financial stability of the group," said HMV Chief Executive Simon Fox.
HMV said current trends in trading remained in line with the 14 per cent drop in total sales reported on May 20.
Shares in HMV, which have lost 86 per cent of their value over the last year, were up 14.3 per cent at 14 pence at 0834 GMT, valuing the business at about £36 million.