Business Needs Helping Hands

However heated the drama between EMI owner Terra Firma and its US bankers at Citigroup is becoming, Financial Times has reminded readers not to lose sight of what the private equity firm chief Guy Hands is doing toward highlighting the problems of highly leveraged buyouts.

The British financier, who bought the famous music group in a leveraged buyout that Citi funded just before the economic downturn, owes £2.6 billion. But it may be a bigger problem for the bank than for his Terra Firma private equity firm.

The FT says Hands has inadvertently gone some way to showing how lax regulations allowed publicly insured banks to make unwise leveraged loans while being ensnared in conflicts of interest.

Hands is suing Citigroup claiming that the bank, which funded most of the £4.2 billion Terra Firma paid for EMI, misled him by failing to inform him that the only rival bidder had dropped out of the auction.

Since the deal was done in 2007, the value of EMI has fallen in value by more than half the £4.2 billion Terra Firma paid for it. Its auditors doubt the UK major can continue trading.

The UK financial paper says one of “the advantages” that private equity likes to claim for itself is that it keeps things out of the public eye. It also says Hands deserves thanks for holding “this flawed transaction” up to the light to ensure it gets the scrutiny it deserves.

The FT reckons Hands may have been rash to bet on EMI, but at least he did so with risk equity. It says Citi has less excuse for the deal because it’s lent too much on excessively loose terms, possibly confused by its position of being both adviser to EMI and lender to its purchaser. The FT also says the covenant terms in the loan are so loose that Citi may have trouble enforcing them.

Former Citigroup chief Chuck Prince may have had EMI in mind when he observed that the bank had to get up and dance while the music was playing.

For the time being, the music’s stopped and both sides are left with the realisation that someone needs to clear up the mess left from the party.