Shares in HMV Group fell 40 per cent yesterday after warning it was likely to breach banking covenants, putting the future of the entertainment retailer under threat.

The CD and DVD chain said it was facing a “probable covenant breach at the end of January 2013”, and blamed poor sales in the run-up to the crucial Christmas trading period.

Trevor Moore, HMV chief executive, said: “In light of current trading performance, and market conditions, it is probable that the banking covenants will not be complied with at that time.

It would not say what penalties it would face if it did breach its agreements.

“HMV has had a difficult first half,” he added, but said that the retailer was in “constructive discussions with the group’s banks including keeping them fully informed in relation to current trading”.

The warning sent HMV shares down 40 per cent to 2.5p, valuing the company’s equity at just £10 million.

Mr Moore, who recently took over at HMV after leaving photographic chain Jessops, warned that the music retailer, which had previously said it would return to profit in 2013, would not meet its expectations for the year to April.

HMV, which operates from about 230 stores around the UK and a further 16 in the Republic, yesterday reported like-for-like sales down 10.2 per cent in the 26 weeks to October 27th.

The pre-tax loss narrowed from £48.1 million to £37.3 million, and the loss per share fell from 11.3p to 8.8p. In May, HMV agreed the £32 million sale of the Hammersmith Apollo to a company partly owned by AEG, in a move that helped the retailer cut its net debt.

The retailer has become a high-profile victim of the move away from high street entertainment sales, as consumers increasingly download music and internet competition reduces its market share. – Copyright The Financial Times Limited 2012 / Reuters