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The source said that as the terms of the covenant get stricter, EMI is almost certain to fall short of the next "covenant test," which comes at the end of March.
BROTHER, CAN YOU SPARE $160M?
Hands Has Another Plan to Avoid Default and Potential Loss of EMI, Say Sources
Guy Hands is considering asking Terra Firma investors for more than £100 million ($160 million) in a bid to avoid default and hang on to EMI Music, a person familiar with the situation told the Financial Times.

What's not generally understood about thew situation is that Terra Firma secured two loans from Citigroup, one backed by EMI Music Publishing, which is healthy and is not at risk of default, and a second £950 million loan is backed by struggling EMI Music, the Wall Street Journal’s Ethan Smith and Dana Cimilluca pointed out in a follow-up story.

Last June, Terra was forced to pay Citi extra cash because the record company failed to meet loan covenants requiring it to maintain a certain ratio between its debt and cash flow. EMI Music met the terms of two subsequent quarterly tests, in September and December, thanks largely to the revenue generated by the reissued Beatles catalog.

This source said that as the terms of the covenant get stricter, EMI is almost certain to fall short of the next "covenant test," which comes at the end of March. In anticipation of that shortfall, EMI is putting together a business plan to present to Terra Firma. If Terra Firma accepts the plan, the private-equity firm in turn would seek the funds from investors. The £100 million would be sufficient to keep EMI Music within the loan requirements through March 2011, the source added.

If the investors don't approve the additional payment, Terra Firma could be in default, potentially setting the stage for Citi to take control of EMI as a whole, one option being to split it up and sell it. Though the test falls in late March, the companies would have until late May to inject the additional cash, according to the source.

On the other side of it, Terra’s plan could help put pressure on Citi to agree to forgive some of the debt, an outcome Hands has been hoping for, inspiring Terra’s pending lawsuit alleging it was deceived by Citi over its handling of the takeover in 2007.

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