Guitar Center Is Going Down
Not only is Guitar Center the world’s largest musical instrument retailer with roughly 270 locations across the United States, it also holds an impressive amount of debt.
From Moody’s latest report on Guitar Center:
Moody’s Investors Service (Moody’s) today downgraded Guitar Center Inc.’s (GCI) ratings. The downgrade and negative outlook reflect Moody’s continued concern regarding GCI’s significant and relatively near-term debt maturities. Excluding the company’s $375 million asset-backed loan facility, approximately 65% of the company’s long-term debt matures in April 2019.
GCI’s Corporate Family Rating was downgraded to Caa1 from B3, and its Probability of Default Rating was downgraded to Caa1-PD from B3-PD. At the same time, GCI’s senior secured first lien notes were downgraded to Caa1 from B3 while its unsecured notes were downgraded to Caa3 from Caa2. The rating outlook is negative. This concludes the review for downgrade that was initiated on Sep. 28, 2017.
“The downgrade considers that despite Moody’s expectation that GCI will generate relatively stable earnings and positive free cash flow, a significant majority of the company’s debt matures in less than 18 months,” stated Keith Foley, a Senior Vice President at Moody’s. “GCI’s cash flow on its own will not be enough to materially reduce debt and improve leverage within the time frame the company has to address its debt maturities,” added Foley.
The Caa ratings reflect very high credit risk and are the highest risk junk bonds you can acquire. With a negative outlook, Moody’s expect the company is nearing default.
The following was from a filing dating back to December of 2012. Looks as though the management of Guitar Center has had a bit of an addiction for debt over a long period of time.
Risks Related to Our Indebtedness
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under our debt agreements.
We are highly leveraged. As of December 31, 2012, Holdings”™ total consolidated indebtedness was $1.581 billion, which includes Guitar Center”™s debt of $1.017 billion. This level of indebtedness could have important consequences to our business, including the following:
Â· it will limit our ability to borrow money or sell stock to fund our working capital, capital expenditures, acquisitions and debt service requirements and other financing needs;
Â· our interest expense would increase if interest rates in general increase because a substantial portion of our indebtedness, including all of our indebtedness under our senior secured credit facilities, bears interest at floating rates;
Â· it may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;
Â· we are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;
Â· it may make us more vulnerable to a downturn in our business, our industry or the economy in general;
Â· a substantial portion of our cash flow from operations will be dedicated to the repayment of our and Holdings”™ indebtedness, including indebtedness we may incur in the future, and will not be available for other purposes; and
Â· there would be a material adverse effect on our business and financial condition if we were unable to service our (or Holdings”™) indebtedness or obtain additional financing as needed.
When all of their debt matures in Aprils of 2019, Guitar Center might have to go Chapter 11. Difficult times for retailers generally. Especially difficult times for retailers with such high leverage.
If you were hired as a consultant, in order to fix Guitar Center’s financial problems, what would you do? You can assemble a team of individuals to assist you and you have full support from the top management.
You cannot just go have drinks with Janet Yellen and convince her to bail them out either. What would you do?
Guitar Center has little choice but to restructure debt. And they have already started exploring those options.