Equity cure

By THIS IS MONEY
Updated:

 

The Daily Mail City team explains what equity cure is and how it can be a sticking plaster for businesses in intensive care

A new medicine?

Of a kind. Only this type of treatment is more like a band aid, a sticking plaster for businesses in intensive care.

Explain

If a company is in danger of hitting the buffers, its creditors can often force owners to pump in some more cash, or equity.

These 'cures' are most common when firms have borrowed too much, and then suffer a slump in trading.

An example

EMI, the venerable music label behind the Beatles and Rolling Stones through to Lily Allen and Florence and the Machine.

Its private equity owner Guy Hands loaded up the firm with £3.2bn of debt when it bought EMI in 2007. The loans have come back to haunt Hands and investors in his Terra Firma buyout fund.

Why?

Following an unremitting plunge in CD sales, EMI is in breach of the terms of its loans. Now

Hands and his shareholders will have to stump up more capital, or risk having its lender, Citigroup, seize control of Terra Firma's biggest-ever investment.

What now?

A £120m 'cure' would be enough to keep Citi sweet until next spring, but Hands is attempting to raise £360m to keep it off his back until 2015.

But having lost around £2bn of their investment in EMI, the private equity baron may struggle to persuade investors to throw yet more good money after bad.

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