HMV: It gets worse

BBC business editor Robert Peston on His Master's ailing Voice

I have been told by two music and entertainment companies that they can no longer get credit insurance for additional sales to HMV.

Here is an extract from an e-mail sent by the "head of credit and collections" at the UK arm of a major UK manufacturer and distributor of CDs and DVDs:

"I need to advise you that our credit insurers have significantly reduced our insured credit limit on all HMV entities. Based on the current HMV balances, the limit is not sufficient to support any sales on an insured basis moving forward.

"I have this morning met with the Chief Executive and Risk Director at the insurance company to understand the reasons for such a quick and drastic reduction. Due to HMV's listing on the stock exchange, they are unable to divulge the reasons for their decision. They met with Simon Fox last week and whilst they have said that HMV has provided everything asked for, they are clearly worried following the public announcement that bank covenants may not be met. A further review will take place in 4 weeks time."

I have put this to Simon Fox, the chief executive of HMV, which issued a profit warning on 5 January after lousy trading in the run-up to Christmas.

He said he was unaware that credit insurance had been so drastically scaled back - but he said he wouldn't necessarily know, because credit insurers deal with suppliers, not with HMV itself.

When companies can't obtain insurance for their sales, they trade at their own risk.

The entertainment companies I contacted said that for the time being they were likely to trade with HMV on this basis, because HMV is so vital to their ability to sell CDs and DVDs in the UK.

Mr Fox said that HMV had not yet experienced any difficulty in obtaining stock - though that did not surprise him, because this is a time of year when typically it tries to reduce its stocks.

The entertainment and music companies I spoke to were horrified by the idea that HMV might go out of business, because they do not want to become dependent on sales over the internet or through supermarkets.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.