HMV could be forced to reduce its dividend instead of raising funds through a rights issue to offset its fixed costs as the high street retailer sails close to its bank covenants.

The struggling company, which last week issued its second profit warning in three months when it unveiled its long-awaited strategy document, is facing pressure on its balance sheet.

HMV's fixed charges must be covered by earnings before interest, tax, depreciation, amortisation and rent (Ebitdar) by at least 1.5 times but current coverage is just 1.58 times earnings. The company's net debt is also five times higher than estimated Editdar, according to calculations by Goldman Sachs.

In last week's strategy update, HMV said it was committed to maintaining its dividend despite the fact that earnings and free cashflow are below previous guidance. The company pledged to return dividend cover by two times within three years.

Goldman Sachs said in a note that it would not rule out the company raising equity to reduce its current gearing "so as not to breach the covenants with its banks". But the investment bank said that HMV's current dividend payouts are not sustainable, adding: "Dividends are likely to be cut."

The bank estimates that HMV's rent for 2007 is £165.1 million and despite the fact that the company said it would close up to 30 of its Waterstone's outlets, it will have a minimal impact on fixed costs. The company rents shops with lease agreements stretching on average 15 years. HMV can exercise break clauses, which allows early exit from rental agreements. However, such a move requires the company to pay often expensive liabilities to the landlord.

HMV said last week that it was hoping to cut £40 million costs but will maintain its capital expenditure at between £50 million and £55 million.

HMV declined to comment.

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