In its heyday, the EMI brand was synonymous with some of the most stellar names in the music industry. Under the aegis of Sir Joseph Lockwood, the company’s chairman who retired at the age of 70, the likes of The Beach Boys, The Beatles, David Bowie and Pink Floyd signed to the label in the ‘60s and ‘70s.
In 2003, Patrick moved to the UK from Australia, where he had worked as a treasurer at companies such as BOC Gases and Case Corporation. After a spell in the insurance arm of GE UK, he spent four years as a consultant before becoming Group Treasurer at EMI in 2009. He possesses an MBA and a Master of Finance qualification.
Today, the EMI name is as much known for its board room squabbles as its back catalogue. The company has endured a difficult three years as an ownership battle between its private equity buyers and the bank that financed the acquisition has played out in a New York court room and across the pages of the financial press.
Until he embarked on the EMI deal, the financier Guy Hands was thought to have the Midas touch, his eye for a deal unquestioned. So when in 2007, his private equity firm Terra Firma paid £4.2 billion for the 114 year old record label, eyebrows may have been raised at the asking price, but few could have imagined what lay ahead.
To say the £4.2 billion price tag was inflated is something of an understatement. Hands himself has since acknowledged that the company was worth at least £2 billion less than he paid. When Citi, who had financed the leveraged deal, finally took control of the company from Hands this year, the bank concurred, immediately cancelling £2.2 billion of its debt.
EMI’s Group Treasurer, Patrick Clarke, caught the tail end of the storm. He joined in 2009 and was tasked with handling the fall-out of what had already become a fraught relationship. “My job was to come in, rebuild the treasury and get it working properly again. Obviously the pressures in a PLC and an overly leveraged private equity buy-out are quite different,” he says.
Patrick quickly came to terms with the situation. Cash had to be squeezed from every corner of the business, which first and foremost meant suppliers had to be persuaded to lengthen their terms. “We learnt how to get blood from a stone. In every business, they say, ‘cash is king’, but we have had to become extremely good at cash flow forecasting.”
Patrick’s efforts were admirable, but ultimately forlorn. The covenants on the bank loans were crippling the company and would have to be relaxed if the group was to continue doing business. “The covenants were a bit unusual in that they ratcheted down and got tougher and tougher each quarter.”
In February this year it was clear the business was insolvent and the administrators were called in to transfer ownership to the lender. To afford the company respite from its punishing repayment schedule, Citi’s first move was to write off over half the company’s debt, leaving it with a more manageable £1.2 billion in outstanding loans.
Patrick is philosophical about how things panned out. “Once you’re through it you can look back and see how much you have learnt. At the time, you’re in limbo because you can’t plan anything long term. I always use the analogy of the child with the parents fighting. If your owner is suing your lender, it causes big problems,” he says.
Elsewhere, EMI is fighting a different kind of battle altogether: the digital revolution is a challenge all treasuries face, but to those in the music industry it is particularly daunting. “About 95% of the music people listen to is not paid for and sales are diminishing by 10-15% – in the US it’s about 20% a year. The rest of us are just fighting around for the other 5%.”
“There’s a possibility that in five years’ time we don’t sell any physical product. There will always be a hard core of it, but it’s slowing. If we relied solely on physical sales, we might as well wind up the company. Digital sales are the way forward – that’s where the growth is,” Patrick explains.
In this interview, Patrick tells us more about his experiences as Group Treasurer at EMI and what he expects the future holds for his department.
How is EMI’s treasury structured?
Our group treasury is based in London. At the moment there are only three members of the treasury team – a cash manager, treasury analyst and myself. We also have a treasury for our Music Publishing division in New York. A treasurer and an analyst work over there, where they concentrate on the cash management. Our focus is on the needs of the group as a whole.
We have people based in individual countries who are responsible for cash flow forecasts and cash balances but their straight line is into their local finance managers or managing director. The thing about the music industry is that it is quite entrepreneurial and decentralised. So the people in, say, Spain or Italy have a treasurer-like person who does treasury activities, providing information to the centre and treasury services to their operation, rather than as part of a central hub.
When it comes to banking, territories can’t open a bank account without central permission. We provide the treasury policy guidelines which dictate what kinds of accounts can be opened and what controls are required and so forth. None of the other territories is big enough to sustain an independent treasurer, but there is someone in each area that spends some of their time undertaking treasury activities. When the territories have surplus cash, we require them to transfer it to the group treasury. They don’t put money on deposit locally or anything of that sort.
Which banks do you use?
Citi is our sole cash management bank, unsurprisingly as it is our 100% owner. Citibank has communicated that it doesn’t expect to own EMI beyond the short term though, so for now, because the business has had so much disruption over the past few years, we’re not going to force our local subsidiaries to change their local banking partners. They can stay with their existing relationships for the moment. In the past, we have worked with Barclays, HSBC and RBS but while we are in this interim period, Citi is our sole counterparty.
Do you pool your cash?
Not at the moment. When Terra Firma acquired us, the money was borrowed and guaranteed by certain EMI entities. Some entities are guarantors to the loans and others are not – usually for local legal reasons. So all our cash pools had to be broken apart because you can’t have a guarantor providing a cross guarantee to a non-guarantor, as a cash pool requires, because then the lender has weaker security and the money can leak out of the secured group.
As such, all of the cash pools that Citi had set up in 2007 had to be broken up. Prior to 2007, all our euro territories were in a euro cash pool; North America had a cash pool with J.P. Morgan; south-east Asia had one with Standard Chartered.
Now that Citibank has taken control, the security issues have lessened and so we are rebuilding the cash pools. Rather than a regional pool, it will be a global notional cash pool. The theoretical ideal for cash management is one global bank account. This is rather unrealistic; however, we can move somewhat towards that by forming a global pool rather than having one for LatAm, one for North America, or Europe and so forth – anyone eligible will be able to join the pool. This reduces administration and complexity, something I’m a big fan of. We expect the notional pool to be in place in the very near future.
What sources of funding do you tap?
All our debt is bank debt. When Citi took us over, they forgave a portion of the debt, so our debt pile went from £3.2 billion to £1 billion, but it is still part of the bilateral facility. We had bonds outstanding before the acquisition, then it was the single bi-lateral agreement with Citi.
If accessing the capital debt markets is part of a future LBO, a rating is likely to be a requirement. It’s really just a case of presenting a credible story and you need the people in the C-suite presenting those kinds of stories.
Do you use a treasury management system?
We use a TMS called eTC, which is a Wall Street Systems TMS. eTC is supposed to be an accounting system with a treasury focus. It is used as a general ledger by certain parts of our finance team, and it is very strong on that. From the treasury accounting point of view, it is certainly one of the stronger bits of kit out there. On the other hand, it’s a bit weak in terms of straight through processing (STP), analytics and risk management. It can do it, but it’s not its strength. I’m sure Wall Street Systems would disagree and they could probably make a reasonable case that we aren’t using the full functionality available. Once we get a chance to settle, we will focus on improving the way we use our systems.
We use spreadsheets to process some of the intermediary stages between one treasury system and another. The TMS is not interfaced to our accounting system, so we have to generate offline reports that can then be manually entered into the accounting system. Again, when it’s time to settle a trade we have no automated connection with the payments systems, so we have to manually enter payments.
We also use spreadsheets for a lot of the analytics and the reporting – the non-standard operations, so to speak. The data and the basics come out of the system and we have to then re-cut the data to make it useful for something else. Spreadsheets are the glue that keeps the system together. As a former consultant I recognise this is far from ideal, but we are where we are and keeping the business alive was a higher priority. Again, once we settle I am keen to take spreadsheets out of the equation.
When I joined we hadn’t upgraded in about four years so that was one of the first things we sorted out. We are like most conservative treasuries, we wait until we’re about an upgrade or two behind and then we’ll do it. There is a big upgrade every one or two years, and patches are released in between.
Do you plan to upgrade in the near future then?
EMI were one of the first users of eTC and we’ve had it for about ten years. Having a TMS tender is on the list, but as I alluded to, it’s not one of the priorities at the moment. It is certainly something I’d like to address within the first three months after any takeover though. It’s about building an interface and getting the different systems’ vendors together. We need to organise three or four different people at the same time and build the interface. Our accounting system is Hyperion, which is an Oracle product, the TMS is eTC, the bank accounts are with Citi and our confirmation matching system is Concord Gold. So we’d need four different companies to get it all working together and we’d need local IT.
We are looking at giving systems access to our finance people in other territories. At the moment their cash flow forecasting is all Excel based. I’d like them to be able to just upload directly to our system without having to cut and paste. Some vendors price on a user basis, others on a general basis. So we plan to look at the number of users we have and territories we wish to cover and see what’s out there and what’s best. If we’re sold within the next couple of months, I’d like to have this in place by the end of the calendar year. We want to get the wheels in motion by, at the latest, March next year.
How have you dealt with FX during your troubles?
We arrived at a situation where no one would do any FX with us unless we did it spot and valued the same day and we had to settle first. The banks wouldn’t even give us one hour’s worth of credit!
At the moment, because we have only one counterparty, Citi, there’s no need to use a multi-bank FX platform. However, in future I don’t want to be bank-dependent with regard to our FX and money market funds. Ideally I want a platform on which you can cross-reference everyone. For the future, we’re looking at portals like Bloomberg Dealer.
What do you do with your short-term cash?
Our short-term cash goes to Citi. We pool the funds from the various territories and leave them enough to get through the next couple of days, but any surplus is held in the centre. We use that cash to pay down our revolving credit facility or it is deposited on Citi’s short-term money market desk.
I’m not a big fan of money market funds. We don’t have great swathes of cash sitting around for a long period of time. While we do some term deposits, I don’t see us having to chase yield in the way that a MMF does. It is the treasurer’s job to arrange investments, rather than to outsource that function and pay a fee.
In Australia, where I cut my treasury teeth, there’s no intermediary – you do it yourself. If you want to buy bank CP, repos or corporate CP, you buy it yourself through your dealer – you don’t go through a fund. If you issue CP, you have your banks as your counterparty and they would do the transactions with you.
If we were independent of Citi and had surplus cash, I’d have four or five banks on the telephone and tell them what I was looking for and expect them to sell it to me, rather than expect a fund to do it. We don’t have the billions on our balance sheets in cash that some treasuries do. It’s more in the range of $10 to $100m in cash and it’s generally short-term because we want to get it back and invest it in the business.
If I’m looking for something longer-dated, I’ll negotiate with the banks and not go through a fund. When I look at some of the people who were blown up in MMFs in the US and UK I feel vindicated, but I’m sure it works for some people. I just don’t see the sense of paying someone else to do what I regard as my job.
The Recorded Music division has quite a seasonal cash flow cycle. Most of our cash flows out from now to the end of the year, recording the music and preparing for the Christmas period. Most of our money comes pouring in around Christmas – January and February. We sit on a pile of cash and then it all goes out again. The Music Publishing division is much more stable, they accumulate cash throughout the year and make large quarterly royalty payments at specified times.
At the Publishing division in New York, they are responsible for getting the cash from their division’s territories into the central account for that division, but we then manage the central treasury account for their division. It is then the group treasury’s responsibility to invest it.
In other territories, we take a more hands-on approach. If our operation in Germany, for example, has €3m spare, we have them send it into us. And when they need money, they send in a request and we respond.
Are you SEPA compliant?
We are not, but it is something we are looking at with Citi. We’re going to run a pilot scheme from a UK based shared service centres for one of our divisions. The nature of our business is that most of our payments originate in the territory they are made. We don’t do a lot of cross-border trade.
For example, in Germany, apart from German-derived music, they will be importing music from the US and UK. So if a Tiny Tempah’s album is selling well in Germany, a royalty has to be paid by the Germans to the UK, but of course we can settle that inter-company. All their costs for marketing and promotion are in Germany, so the Germans are making euro payments domestically and they’re getting receipts in euro.
We don’t really have a lot of cross-border payments, which means the rationale for SEPA is reduced. It’s really only when we have to make sweeps from one operation to another – and they are usually a one off. Besides, we are working to put arrangements in place with Citi to reduce the charges. If we do go down the shared services route and go in to other areas, SEPA is something we’d have to look in to, but it’s not a high priority because we aren’t paying a lot in cross-border fees.
Do you have any hedges in place?
No, we don’t. We had a number of interest rate hedges in place under the old facility, but these have now gone. Our debt is now fixed rate as part of the debt forgiveness. The current facility is not expected to be in place too long so we’ll leave it fixed.
As a group, we don’t have one particular exposure to a country or currency. Our FX exposure comes from the balance sheet as we may have mismatches between debt and earnings which can impact covenants and certain cash flows. We will do a full risk review once the new ownership and capital structure is in place.
What does the future hold for the treasury at EMI?
I’ve got 20 projects lined up that I’d love to do – it’s just a question of getting that stability that makes them feasible. The reality is that things are uncertain here and have been for a while. But at the end of the day, I enjoy treasury most when a company is experiencing change and there is scope to make a difference. EMI has certainly fit that desire. We won’t know the future of the function until after the sale – and as someone who claims to be a risk manager by training, if I became upset because of uncertainty, I’d be in the wrong job. The short answer is, watch this space.