UPDATE 3-EMI may need more funds to deal with debt

* May need more equity, particularly in 2011

* Pretax profits before impairments 121 mln stg

* Exploring strategic options to reduce new equity needs

* Terra Firma, Citigroup to enter mediation talks-source

(Adds detail on covenants, background)

By Simon Meads and Kate Holton

LONDON, Aug 18 (Reuters) - EMI's parent company said on Wednesday further equity injections may be needed, particularly in 2011, as the music group continues to struggle under the weight of its debt in spite of an improved trading performance.

But an end to a legal dispute between owner Terra Firma [TERA.UL] and Citigroup (C.N) over the 4 billion pound ($6.26 billion) buyout of EMI could be in sight, as lawyers agreed to mediation talks, a source familiar with the situation said.

The music business, controlled by Guy Hands's buyout firm, generates enough cash to cover interest payments on its 3 billion pound ($4.69 billion) debt burden, EMI parent company Maltby Capital said in its annual report.

However, it needs to address banking covenants that will tighten steadily over the coming years.

Terra Firma has been fighting to keep the business, acquired in an auction at the height of the credit boom, out of the clutches of lender Citigroup after breaching the terms on its debt.

The buyout firm raised 105 million pounds from investors earlier this year to put EMI within its banking agreements until March 2011. [ID:nLDE64A1P9]

Maltby said it is likely there will be a "further significant shortfall" when covenants are tested in March 2011, which could substantially exceed the cash needed this year.

Intensifying already strained relations, Terra Firma lodged a suit against Citigroup late last year, accusing the bank of inflating the price of EMI by not revealing that the only other bidder, Cerberus Capital Management, had pulled out of the auction. Citigroup denies the claims.

Lawyers for Citigoup agreed to a request from Terra Firma's counsel to enter mediation talks next month in New York, though there is no certainty a settlement will be reached, the source said.

STRATEGIC OPTIONS

EMI, led by recently appointed group Chief Executive Roger Faxon, is exploring various strategic options for the business which are expected to reduce the level of new equity needed, the group said.

Terra Firma had signalled it could tap investors for a total of 360 million pounds to meet future covenant breaches until the loans mature.

EMI pretax profit, after restructuring charges but before impairment charges on goodwill and intangible assets, were 121 million pounds for the year to end-March 2010, compared with just 7 million the previous year. Revenues were up to 1.65 billion pounds from 1.56 billion in 2009.

The group posted a total loss of 512 million pounds, compared with 1.57 billion last year, after impairment charges of 602 million pounds, due in part to lower growth expectations for digital and online music.

EMI's improving performance followed success with the release of the remastered Beatles catalogue, which sold over 13 million albums, as well as with newer artists such as Katy Perry, who has sold around six million albums.

Country group Lady Antebellum is the top seller of the year in the United States.

The chart success helped EMI Music, which owns such labels as Parlophone and Capitol, to post a rise in core earnings of 15 percent to 184 million pounds due to a larger share of the global recorded music market.

EMI Music Publishing, which owns the rights to classic songs such as "New York, New York" and "Bohemian Rhapsody", posted core earnings up almost 13 percent to 150 million pounds.

Songwriters and publishers signed to the Publishing division are paid every time a piece of music is used commercially. ($1=.6394 Pound) (Editing by Simon Jessop and Jon Loades-Carter)