Debt Downgrade Hits EMI Shares

EMI Group shareholders heard another sour note Wednesday when a rating service downgraded the British music giant’s debt to “junk” status, sending its shares plunging.

In London, EMI shares fell 13% to their lowest level in a decade after Moody’s Investors Service announced its rating action, citing uncertainty over whether EMI and other record companies will overcome music piracy or generate profits online.

The downgrade, which affects about $1 billion of EMI’s roughly $1.6 billion debt, comes as the firm is scrambling to stay afloat.

With album sales sinking, EMI executives for the last several months have quietly explored plans to join or purchase the music operations of two rivals, Bertelsmann’s BMG and AOL Time Warner Inc.’s Warner Music, sources say.

In a statement, EMI reassured investors that Moody’s action “has no impact on EMI’s liquidity, which remains strong, nor does it trigger any renegotiation clauses or advance repayments of bank credit lines.”

Any bond rating below “investment grade” is considered junk, or higher risk.

The conglomerate, which owns labels including Hollywood-based Capitol Records, releases music by such acts as Norah Jones. It posted a solid rise in profit last year after a dramatic restructuring that shed 1,800 jobs and 400 musical acts.

But the Moody’s analysis predicts the company will continue to struggle.

Citing a “deeply entrenched” consumer penchant for downloading music illegally, the rating firm said it believes “EMI will not be in a position to generate cash flows from its operations sufficient to support an investment- grade rating for the next couple of years.”