Struggling music, books and games retailer HMV faced further pressure to raise funds by selling equity or its Waterstone's book chain after issuing a second profit warning in two months.
The 90-year-old company, which trades from about 700 stores in seven countries, also flagged a higher than expected year end net debt of £130 million and said it did not expect to meet terms of its bank lending rules when they are tested in April.
HMV said it has started talks with its lenders regarding potential changes to its facility agreement.
These changes would ensure "their appropriateness for future trading conditions and to support delivery of the group's strategy", it said.
HMV said its lenders were supportive and talks with them were constructive.
It said it expected underlying pretax profit for the year to end-April to be moderately below a forecast for £45 million, blaming tough trading conditions since it last updated the market in January.
"We think this debt disaster will increase the pressure on the group to either sell Waterstone's or raise emergency equity," said Arden Partners analyst Nick Bubb.
"Neither is a particularly palatable prospect but we still think the least worst option is to sell Waterstone's to (Alexander) Mamut for circa 70 million pounds."
Russian oligarch Mamut, HMV's third largest shareholder with a 6.1 per cent stake, has been linked with a possible bid for Waterstone's along with the chain's founder Tim Waterstone.
Chief executive Simon Fox said HMV was suffering from a difficult consumer environment and the changing markets in which it operates.
"However, our business is adapting quickly to these external factors, and we are confident that our plans will ensure its long-term and sustainable future," he said.
He had previously sought to avoid breaking the lending rules with plans to close 60 UK shops over the next year and make a further £10 million of savings across the group.
Facing intensifying competition from supermarkets, internet retailers and the growing popularity of digital downloading, as well as a tough macro outlook, HMV's problems have been compounded by credit insurers reducing the cover they are prepared to give to suppliers.
HMV also named Philip Rowley, a former chairman and chief executive of AOL Europe, as non-executive chairman to replace Robert Swannell, who has less time available since also becoming chairman of retailer Marks & Spencer.
Reuters
