Guy Hands’s Terra Firma Capital Partners Ltd. is telling investors they could earn a rate of return of as much as 58 percent if they provide cash needed to keep lenders from seizing control of EMI Group Ltd, Business Week are reporting today. More discussion on this is at the Coldplay forum here onwards.
The projection includes any recovery of the original equity, which would probably be worthless without the new investment, according to a presentation Terra Firma sent its clients April 27. The firm needs to corral support from 75 percent of fund investors and inform Citigroup Inc., EMI’s lender, by May 14, according to the document.
Terra Firma asked current and third-party investors for 360 million pounds ($546 million) in two parts, to restructure EMI’s 3.2 billion pounds in loans and bring the company into compliance with its debt agreements. While EMI, whose artists include Coldplay, Queen and Pink Floyd, produces sufficient cash flow to service its obligations, it hasn’t lowered the debt enough to keep the company from breaching an agreement with lenders, according to the presentation.
“Investors really don’t like these deals because it is just asking them to put in some more money so they lose a bit less,” said Jérémie Le Febvre, partner at global placement agent Triago in Paris, which helps firms raise money. Private equity firms are restructuring loans in companies acquired at the peak of the buyout boom, to cut debt and extend maturities after a record rally in credit markets. Blackstone Group LP’s Hilton Worldwide hotel chain last month completed a deal to reduce debt by almost $4 billion and extend the maturity by two years.
Intrawest ULC, the owner of Olympic skiing resort Whistler Blackcomb that’s backed by Fortress Investment Group LLC, refinanced a loan that was due in December, after lenders threatened to auction off the resort during the Olympic games. The new loan matures in 2014, Intrawest said in a statement April 27, without giving details. The equity returns projected for EMI assume a successful exit of the fund’s investment by 2015.
Terra Firma has cut the fair value of its 2.6 billion-euro ($3.4 billion) EMI investment to zero, according to a February letter the firm’s 5.4 billion-euro fund, TFCP III, sent to investors. The fund, which put 59 percent of 2.8 billion euros it invested into EMI, owns 63 percent of the company. A separate fund, TFCP II, owns 23 percent. In addition to EMI, Terra Firma is also negotiating with creditors over TFCP III’s second-largest investment, 691 million euros in aircraft leasing company AWAS, according to the letter. The fund’s stake is now marked at 466.2 million euros. The company, with earnings before interest, tax, depreciation and amortization of $652.2 million, has about $378 million in debt maturing this year that needs to be refinanced, according to the letter.
EMI has earnings before interest, taxes, depreciation and amortization of 330 million pounds in the fiscal year 2010, according to Terra Firma. The company may sell its Japanese division and its EMI Christian Music Group, the document shows. Terra Firma is seeking an initial 105 million pounds from investors to help EMI meet debt covenants through March 2011, according to the presentation. The private equity firm is also seeking guidance from investors whether they would be willing to invest an additional 255 million pounds to ensure EMI stays compliant through 2015, when its loans end. Terra Firma said it would be willing to contribute 55 million pounds.
EMI was unable to get money from other major music companies through a combination of licensing and outsourcing transactions, although talks are continuing, according to the presentation. “The majors indicated that no deal would be possible unless an equity cure for a longer period was achieved, given the perceived risks associated with the debt holder subsequently becoming the owner of the company,” Terra Firma said.
Pictures of Chris Martin in New York City (23rd April 2010):