Sanctuary’s Great Escape

With an escape act that would have made Houdini proud, Sanctuary Music Group has seemingly persuaded creditors to write off £35 million (US$62 million) worth of debt and raised another £110 million by selling new shares to institutional investors.

Corporate and investor relations director Philip Ranger accepts cynical critiques that HBOS (Bank Of Scotland’s corporate investment wing) has only scrubbed £17 million in debt to protect the other £115 million it’s owed – and bondholder Highbridge has written off £18 million to protect a further £12 million – but he said it also shows both parties still have faith in the company pulling through.

The banks and bondholders might have been faced with the old adage that says, “If you owe the bank a thousand and you haven’t got it, you have a problem. If you owe the bank over £120 million (as Sanctuary did), then the bank has a problem,” but neither seem to have taken the view that the problem’s so big that it’s time to pull the plug.

In October, Investec analyst Malcolm Morgan told The Guardian, “It’s absolutely crucial that the banks still think this is a business which is salvageable.” At the moment, it seems that they do.

Given that HBOS obviously knows Sanctuary will struggle to mount a full recovery while it’s still carrying around £35 million worth of debt (and only has around £3 million cash surplus to play with), it’s hard to imagine the investment bank hasn’t taken into account that – despite the £17 million write-off – it might still need to back the company with further shorter-term borrowing facilities.

The details of the £35 million debt-forgiveness deal, and the fact that broker Evolution Securities Limited is getting institutional investors’ support for the £110 million equity fund raising, means Sanctuary had at least some good news to take to the city alongside the bad news that, during the year ending September 30th, it lost £142.6 million on turnover of £156.1 million.

About £90 million of that was down to exceptional items resulting from provisions, asset impairments and restructuring costs but, along with a change in the methods of accounting, the day-to-day trading loss for the period still runs out at about £45 million.

The results were published January 27th, just within the 120-day deadline the stock exchange allows from the end of the relevant financial period, which is what Ranger said the plan was all along.

Many U.K. papers have made much of the fact that the new equity fund raising will dilute the stock holding of existing shareholders, but without it their stake might have completely dissolved.

The constant drip of bad news over a six-month period has already eroded the share price from about 40 pence last summer to just more than one penny on the day the latest results were announced.

Given that the £35 million write-off and a successful equity fund raising will reduce the debt by about 90 percent from £150 million to about £15 million, Ranger seems optimistic that the worst of the company’s problems are over.

“Sanctuary has been through some difficult times, but it retains a very strong roster of artists across all its businesses and, with the support of shareholders and bankers, we intend to focus on returning the company to profitability and long-term growth,” he told Pollstar.

The company has already taken steps to reshape itself as a leaner and fitter entity by shedding more than 200 staffers and cutting back the financially disastrous urban music division run by Mathew Knowles, Beyoncé’s father. Andy Taylor, the music group’s co-founder, will also relinquish the role of executive chairman. He will become chief executive and an outsider will be brought in as non-executive chairman.

– John Gammon