THE private equity firm Terra Firma is in talks about a huge restructuring of the debt-laden music giant EMI.

The buyout group led by Guy Hands, who is also chairman at EMI, is in discussions with its lender, Citigroup, about a cash injection into the music label, whose artists include The Beatles and Robbie Williams. In return, Hands is attempting to negotiate a big writedown of its £2.5 billion debt pile as well as a new set of financing arrangements.

The financier has proposed an injection of between £250m and £300m and requested that Citigroup write off about £500m of the debt from the label’s more troubled recorded music division.

Citi was left holding the entire debt package associated with Terra Firma’s £4 billion takeover in September 2007, after an attempt to sell some of it to secondary investors was scuppered by the credit crunch.

If the restructuring is agreed, it would mean that Hands has put nearly £500m in additional capital into the business, on top of the £1.7 billion he paid in the original deal. He has already spent £170m since the deal on restructuring and cash injections required under the terms of its debt.

He has told Citi his proposal is a long-term solution for EMI and will put the company on a firmer financial footing. Hands believes if the business is more soundly financed, Citi has a better chance of syndicating the debt, which Terra Firma does not need to pay back until 2015.

The deal was agreed under a “covenant-lite” structure, which means that there are almost no triggers on the debt that enable the lender to step in if a default occurs.

The main terms are that the debt must stay within a certain multiple of earnings, which is tested every six months. If it does not, Terra Firma can inject new equity to “cure” the difference, which it has been forced to do on three occasions since September last year, costing a total of £70m.

EMI has been beset by problems and has undergone a radical operational restructuring costing a further £100m, with a retreat from some international markets including parts of Asia.

A workforce reduction of almost 2,000 has proved the most controversial move and contributed to the loss of several leading acts to rival labels, such as the Rolling Stones and Radiohead, who were angry at Hands’ ruthless cost-cutting.

Hands’ debt proposal, as well as requiring the agreement of Citi, needs the approval of 75% of his investors, who must decide if they are willing to allow him to take such a large amount of money from Terra Firma’s most recent €5.4 billion (£4.6 billion) fund, which has about €2.7 billion left to spend.

EMI’s £2.5 billion debt is split roughly equally between its two divisions, which have experienced markedly different levels of performance.

Music Publishing, which licences the rights to over 1m songs, has largely performed well, generating earnings of £117m for the last financial year, just £1m short of Terra Firma’s expectations.

It is in the recorded music business, where former ITV chief executive Charles Allen was made chairman earlier this year, that EMI’s problems have been focused and where Hands wants the debt reduction to take place.

According to Capital Structure, the debt specialist, earnings before tax and interest payments have increased from £61m to £163m since Terra Firma took control. However, this is still almost £30m lower than the private equity firm had budgeted for in 2008.

In March, Terra Firma disclosed that it had written off half of its equity investment in EMI, acknowledging the likelihood of heavy losses on the investment.

Citi has also partly written down the debt.

In a long career, Hands has made some successful investments but he will count EMI as his worst. He once joked to a friend that the best deal he could ever have done was not to buy EMI.

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