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Rating Action:

MOODY'S DOWNGRADES EMI GROUP PLC'S SR. LONG-TERM DEBT RATING TO Ba1 (FROM Baa2); OUTLOOK IS STABLE

11 Mar 2003
MOODY'S DOWNGRADES EMI GROUP PLC'S SR. LONG-TERM DEBT RATING TO Ba1 (FROM Baa2); OUTLOOK IS STABLE

Approximately GBP640 Million of Debt Securities Affected

London, 11 March 2003 -- Moody's Investors Service today downgraded the ratings for EMI Group plc's Eurobonds due 2008 and Capitol Records Inc.'s senior notes due 2009 (guaranteed by EMI Group plc) to Ba1 from Baa2. The outlook is stable. The rating action is based on Moody's expectation that the current softness in the world recorded music markets is likely to continue throughout 2003 and beyond and might well, in Moody's opinion, put renewed pressure on EMI's profits and debt protection measurements following their expected recovery during the current financial year. A stable outlook at the Ba1 rating reflects the relative resilience of EMI's market-leading music publishing business, the company's improved cost structure and management's ongoing commitment to debt reduction through asset sales.

Moody's also highlighted ongoing uncertainties about the ability of the company (and the music industry as a whole) to tackle the problem of music piracy and to build (in competition with peer-to-peer file swapping services) its own nascent Internet distribution services. The agency acknowledges that measures like more rigorous enforcement of existing laws protecting intellectual property rights, lobbying for stricter legislation, improved public relations work and, most importantly, the development of attractive, credible legal download services are being pursued vigorously by EMI (and the industry). While these measures are beginning to show palpable rewards such as a higher number of successful police actions against professional pirates across territories and initially favourable rulings in court to force ISPs to identify heavy peer-to-peer users, the piracy challenge remains daunting in the face of consumer behaviour, including the absence of a sense of culpability when downloading illegally, that is already deeply entrenched.

Given the unfavourable industry environment, Moody's believes that EMI will not be in a position to generate cash flows from its operations sufficient to support an investment grade rating for the next couple of years. While Moody's believes that the current financial year will show palpable profit increases due to a much improved cost base and debt reduction aided by asset sales, a further revenue decline in 2003/04, as expected by Moody's, is, in the agency's opinion, likely to translate into lower absolute profit levels going forward even if improved margin levels in recorded music can be maintained. Indeed, the maintenance of improved margin levels on the basis of EMI's new management focus on profitable releases as well as continuing progress in combating piracy are important prerequisites to maintain the Ba1 rating level and a stable outlook. Given weak near term cash flows, rating and outlook assume that EMI will continue to supplement operational cash flows with further asset sales to achieve its stated aim of continuing debt reduction. EMI has a history of negative free cash flow generation (after dividend and capex) and Moody's believes that EMI's retained cash flow (after working capital and dividends) might well be no more than a single digit percentage of net debt, even if adjusted for exceptional outflows during the current financial year.

Finally, the rating assumes the continuation of access to the company's bank facilities, which are subject to material adverse change and financial covenant tests. EMI has no material refinancing needs until March 2005 when its syndicated bank facility falls due. EMI's bank facilities together with it longer-term public and private placement debt should cover the company's ongoing funding requirements in the ordinary course of business.

EMI Group plc, one of the world's leading music recording and publishing companies is headquartered in London, England. Capitol Records Inc. is its indirectly wholly-owned subsidiary.

Paris
Eric de Bodard
Managing Director
Unknown Group
Moody's France S.A.
33 1 53 30 10 20

London
Christian Rauch
Senior Vice President
Unknown Group
Moody's Investors Service Ltd.
44 20 7772 5454

No Related Data.
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