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EMI needs to get any licensing deal done by Wednesday, in order to help it satisfy a so-called covenant test showing whether EMI's finances conform with the requirements of the loan agreement with Citigroup.
DOWN TO THE WIRE FOR EMI
Company’s Last Hope in Raising Cash to Avoid Default Is Sony Music, After UMG, WMG Pass
EMI is running out of time to raise cash by licensing its catalog and currents to a rival, increasing the odds of a debt default, people familiar with the matter told the Wall Street Journal’s Ethan Smith and Dana Cimilluca.

The British company has been trying to strike licensing deals over the past few days, but UMG said it ended talks last week, while Warner Music chose not to negotiate. That leaves Sony Music, but it, too, is close to bowing out, according to the same sources.

EMI had sought to enlist one of its Big Four rivals to distribute and market its music in the U.S. EMI has been seeking an upfront cash payment, as much as $150 million per year, in exchange for several years of distribution rights. If such a deal were to go through, EMI would likely shut down most of its operations in the U.S., the world's largest recorded-music market.

People familiar with the matter said that EMI needs to get any licensing deal done by Wednesday, in order to help it satisfy a so-called covenant test showing whether EMI's finances conform with the requirements of the loan agreement with Citigroup. A cash advance from a licensing deal would help EMI meet the test.

Sony's move to end the talks appears likely to block that option, Smith and Cimilluca note. That would close off one of the remaining avenues for Terra Firma as it seeks to keep afloat its ill-fated investment in EMI. Terra Firma’s debt now stands at more than £3 billion, compared to the £2.4 billion ($3.6 billion) purchase price.

The story so far: Terra Firma has already taken big write-downs on its investment and made cash injections into EMI. Guy Hands is currently attempting to raise £120 million from investors, in order to prevent EMI from defaulting. Such a default could allow Citigroup to seize the company, break it up and sell it.

EMI had hoped that the appeal of its rich catalog (including, of course, The Beatles and Frank Sinatra, among others, plus current hit acts like Lady Antebellum, would attract a big and quick payoff. But it was never clear that such a deal could be struck quickly enough to meet Terra Firma's next covenant test.

People familiar with the matter said that there was a remote possibility that EMI and Sony could still reach a licensing deal, possibly involving another, smaller territory and a commensurately smaller payment, closer to $50 million. But they said that was a long shot.

Terra could also raise cash from investors that could be used as an "equity cure" for any shortfall in the covenant test. But the company has already tapped investors more than once for such payments, and the current one would require an additional £120 million. It would have until June to raise that cash.

All three of EMI's rivals are wary of antagonizing Citigroup, Smith and Cimilluca point out. EMI is the collateral on the £3 billion package of loans written by the banking giant. A deal that would involve scaling back its U.S. operations could sharply reduce EMI's value. If a deal looked imminent, Citigroup could take steps to try to block it.

At risk of default is a £950 million loan backed by EMI Music. A larger loan backed by EMI Music Publishing is believed to be performing. But the two are linked, and a default on either would result in a breach on the entire package.

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