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17 Apr 2002
MOODY'S EXPECTS TO ASSIGN Baa2 RATING TO EMI GROUP PLC'S PROPOSED ISSUE OF SR. BONDS; OUTLOOK IS NEGATIVE
Moody's Investors Service today said that it intends to assign a Baa2 rating to EMI Group plc's (EMI) proposed issue of £500 million in new bonds with maturities of five to ten years subject to final documentation. The bonds will be guaranteed by Capitol Records Inc. and are expected to rank pari passu with EMI Group's existing senior debt obligations. At the same time the agency affirmed its Baa2 rating of Capitol Records Inc.'s senior notes due 2009, which are guaranteed by EMI. The rating outlook for all ratings is negative.
Moody's said that the Baa2 rating continues to reflect EMI's long-standing position as one of the global industry leaders in the highly concentrated recorded music industry. In addition, Moody's believes that EMI's world-leading music publishing unit (32% of 2000/2001 operating profits) will continue to underpin the recorded music business with more stable profits and cash flows. However the Baa2 rating and a negative outlook also reflect the deterioration in EMI's debt protection measurements during the financial year ended March 2002 and Moody's expectation that against the backdrop of difficult and unpredictable conditions in the global music markets it will remain a challenge for EMI to stabilize its recorded music revenue base and to achieve the envisaged level of cost savings from recorded music's far- reaching restructuring initiatives. The ongoing damage to the industry from piracy and uncertainties about new internet-based distribution models are also reflected in the Baa2 rating level.
EMI is expected to report markedly lower adjusted pre-tax profits (before amortisation and exceptional items) of around £150 million for the financial year ended 31 March 2001/02 (after £ 260 million in 2000/01) reflecting another good year for music publishing, offset by a weak performance of recorded music. Recorded music's sales and profits were severely impacted, in particular by weak Latin American and Asian economies and by continuing under-performance in the US where EMI remains the weakest of the majors with a total distribution share for albums of 10.6% for the 2001 calendar year despite some improvements over 2000 (9.7%).
Moody's noted that in reaction to these developments EMI replaced Recorded Music CEO Ken Berry with Alain Levy in October 2001. Levy's recently outlined strategy for the unit focuses in a first phase, to be implemented by September 2002, on delivering sustainable annual cost savings of £ 98.5 million through a 20% work force reduction, back-office rationalization, more efficient label structures and marketing techniques as well as through a slimmed-down artist roster. A second phase is aimed at positioning EMI for the medium term in areas such as technology and new formats with initiatives to be implemented from the 2002/3 financial year onwards. At the same time EMI also stated its intention to reduce debt through free cash flow generation and asset sales and took an important step towards cash conservation by cutting the dividend significantly.
Moody's believes that the appointment of a well-reputed new top manager for recorded music in combination with the restructuring measures announced augurs well, initially for a recovery of the company's profitability and over the medium term to position it for a resumption of top-line growth. However, execution risks remain significant given the far-reaching nature of EMI Recorded Music's internal reorganization process, a highly competitive business environment and the cyclical and structural challenges to the world music markets.
EMI has taken steps to address the challenges which it faces from the expected gradual shift in distribution towards subscription and download models distributed via the internet, the rating agency said. The group has positioned itself for this development through the MusicNet service, owned and operated together with RealNetworks and record music industry majors AOL Time Warner and Bertelsmann, which now has started operations in the US. EMI has also licensed its content to other distributors, including rival platform pressplay, owned by Sony and Vivendi Universal. However Moody's cautioned that the business model for the service, including pricing and usage terms is still early stage. In addition, MusicNet (and pressplay) face regulatory challenges and final licensing terms with music publishers have yet to be negotiated.
Against this background ratings maintenance assumes not only that EMI can demonstrate successful execution of its strategic plans, including debt reduction but also that the company can realize proceeds from asset sales in the near term to counterbalance cash outflows from restructuring provisions. It also assumes that any material acquisition costs will be equity-financed in the near-term.
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.
No Related Data.
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