UPDATED: Struggling entertainment retailer HMV has revealed its banks have relaxed its terms and given it more headroom in a move that will have a “materially positive impact on the Group’s profitability and cash flow”.

HMV said: “If current trading patterns continue, we now expect, on the basis of our current plans, to be able to reduce the group’s net debt by approximately 50% over the next three years.”

However, HMV said losses will be larger than first expected. It said “in expectation of continuing challenging conditions” the retailer believes it is now likely to deliver a “slightly larger loss of around £10m for the full year”.

The banks have agreed to waive a covenant test due this month and have reviewed other tests which gives HMV “significantly enhanced headroom”.

Chief executive Simon Fox said the move is “enormously welcome”.

He told Retail Week: “It’s extremely significant. This puts us in a materially different place. We have solved a significant potential crisis by the coming together of supportive suppliers and banks.”

Fox added that the move enables HMV to “focus time and efforts on our customer proposition rather than with banks and advisors”.

However, he added: “It doesn’t change the underlying issues in the market. They remain very challenging.”

The retailer has been posting relentlessly declining sales as its core markets - music, film, and game - contract. It has been repositioning itself as an entertainment brand and is aiming to focus on technology as part of its turnaround.

HMV said its banking syndicate has made the decision “in response to a change in the nature of HMV’s relationships with its key music and film suppliers”, including the intended grant of warrants that would give the suppliers 2.5% equity in the business.

The retailer said the move will “have a materially positive impact on the Group’s profitability and cash flow”.

For the year to April 30, HMV expects net debt to be £175 to £180m. HMV added the reduction in debt is before any potential disposal proceeds from the ongoing review of its Live business, which it is mulling selling.

Fox told Retail Week there is a “reasonaly high probability we’ll end up with a sale of the [Live] business.”

The banks have also re-set tests relating to the two 12-month periods ending April and July 2012.

Fox said:  “These developments represent a material improvement in our financial position relative to the statement we made at the time of our Interim results.

“The new relationship with our suppliers and the support of our banks will now enable HMV to wholeheartedly focus all of its energies - working in close partnership with its suppliers, on serving the changing needs of its customers ever more effectively.

“As a key part of this we remain committed to improving our specialist ranging and merchandising of music and DVD while also continuing to grow our sales in portable technology and further developing our online and digital offers.”

Universal Music UK chairman and chief executive David Joseph said: “HMV is a vital part of the UK music industry and we are delighted that the support of the film studios and music companies is helping to secure its future. We look forward to working closely with HMV in the years ahead.”