Hopes that struggling entertainment retailer HMV can survive were boosted after it cut deals with banks and music and film suppliers that will see an imminent test of its lending rules waived and future tests relaxed.
Shares in the 91-year-old retailer more than doubled on Friday after it said its banking syndicate led by state-backed Lloyds Banking Group and Royal Bank of Scotland had agreed to amend the covenant package on its existing borrowings.
The banks have agreed to waive the January 2012 covenant test and to re-set tests relating to the 12 month periods ending April and July 2012 with significantly enhanced headroom, HMV said.
The firm expects debt at its April 30 year end to be 175-180 million pounds and in expectation of continuing challenging conditions forecast a loss of about 10 million pounds. Analysts were previously forecasting breakeven.
HMV's lenders agreed to the amendments in response to a change in the firm's relationships with its key music and film suppliers.
These changes include the grant of warrants representing 2.5 percent of HMV'S equity to these suppliers, who include Vivendi owned Universal Music UK.
This will have a materially positive impact on the group's profitability and cash flow such that if current trading patterns continue, we now expect ... to be able to reduce the group's net debt by approximately 50 percent over the next three years, HMV said.
This anticipated reduction in debt was before any assumed disposal proceeds from the ongoing review of HMV's Live music venue business.
Shares in HMV, which prior to Friday's update had lost 91 percent of their value over the last year, were up 110 percent at 5.1 pence at 1458 GMT, valuing the business at about 21 million pounds.
Last month the firm, famous for its Nipper the dog trademark, posted wider first-half losses and warned it was in danger of going out of business. Earlier this month it reported a sharp fall in Christmas sales.
HMV, which trades from 256 stores in Britain and Ireland, employing 4,500, 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 has closed stores, and sold its Waterstone's book chain and Canadian arm.
It is also facing intense competition from internet retailers and the rise of digital downloading as well as the march of grocers such as Tesco into general merchandise ranges.
(Reporting by James Davey; editing by Paul Sandle)