EMI's pre-pack could be the start of things to come

MUSIC COMPANY EMI’S woes have been ongoing and plentiful. However, few could have predicted its lender would end up buying the business in administration rather than the more traditional option of swapping debt for equity. Will insolvency practitioners (IPs) find other banks asking for the same kind of deal?

EMI appointed joint administrators, Peter Spratt and Tony Lomas, from PwC to conduct a pre-pack administration earlier this month. In this type of insolvency, a business is marketed prior to an IP’s appointment. The sale is arranged before the company enters administration and sold immediately after.

Often banks calling in their debt would simply swap debt for equity and take a large stake in the business. It is quite unusual for a bank to take a pre-pack administration route to achieve the same goal.

The advantage of a pre-pack for a lender, over swapping debt, is the reduction in debt owed to other creditors. In a pre-pack, like all administrations, debt is likely to be reduced to either nothing or just a few pence for every pound owed. In a debt for equity swap you still have outstanding debts to other creditors.

Citigroup reduced debt owed to itself by EMI to £1.2bn, writing off £2.2bn. The bank also made £300m of cash available. Such investment would have been very difficult for a traditional buyer.

Andrew MacCallum, a partner in European restructuring at Alvarez & Marsal, said this type of pre-pack, where a bank buys the business, has always been an option in an “administrator’s tool kit”. It is already widely used by banks across Europe.

More of these types of pre-pack could be seen in the future as banks become more aggressive at reclaiming funds owed to them, he believed.

However, according to a source close to the case, the chain of events that led to this pre-pack was unusual and was unlikely to occur in most cases.

Unlike the majority of businesses, EMI’s only lender was Citigroup, not a consortium of banks. In a consortium the decision to put a company in administration would need consensus. EMI’s holding company Maltby Investments also had just two directors. They appointed the administrators and as there were so few directors it was easier to obtain a decision and agree terms of the pre-pack.

Former EMI owner Guy Hands and Citigroup had previously been in various high profile arguments on the future of the music business. Because of this Rob Horton, partner at Bridge Business Recovery, believes that a breakdown of communication could have contributed to Citigroup taking such a strong action.

Normally a business would try to come to an arrangement with its bank on either swapping debt, extending its bank loan or credit facilities. If the bank felt negotiations have broken down and they are incapable of coming to an agreement, they may have felt there was no other option but to take an administration route to reclaim its outstanding funds.

Although an unusual case it seems likely it will not be an isolated incident, and with more large companies struggling to agree repayment plans then more could be taken over by banks through the insolvency route.

A SIP 16 transparency report will be published later this year to explain the administrators’ decision to sell the business in a pre-pack, and reveal what unsecured creditors are likely to receive.