Financial Performance

S&P Downgrades Guitar Center Rating to CCC-

The rating agency says Guitar Center bondholders could receive less than par in a restructuring, which would amount to a "selective default."
Matthew HellerNovember 29, 2017

S&P Global Ratings on Wednesday downgraded Guitar Center’s credit rating further into junk territory as the company attempts to restructure its $1.6 billion debt burden.

Guitar Center has not made any debt-cutting plan public. The world’s largest retailer of musical instruments has $615 million of 6.5% notes that mature in April 2019 and have been trading below par.

But in downgrading Guitar Center’s rating to CCC- from CCC+, S&P noted that it “is currently negotiating with its noteholders for a potential debt exchange transaction.”

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“We think debt holders could receive less than par and/or the original promise on the current debt — a scenario we would view as a distressed transaction and tantamount to a selective default,” S&P said in a news release.

The rating agency also lowered Guitar Center’s debt outlook to negative, reflecting its view that “a debt exchange transaction could occur in the near term, based on our expectations that operating trends will not materially improve ahead of its debt maturities in April 2019.”

Like other retailers, Guitar Center, which is majority-owned by private equity firm Ares Management LP, has been hit by the shift to online shopping. In addition to, “musicians can now buy their instruments online from Sweetwater Sound Inc., as well as directly from guitar makers themselves, such as Fender Musical Instruments,” Reuters reported.

S&P recently found that the percentage of U.S. retailers with high-risk CCC ratings has doubled since the beginning of the year. Eighteen percent of U.S. retail ratings are in the CCC range, which indicates that an obligation is vulnerable to nonpayment.

The musical instrument industry grew 9% to $7.1 billion in retail sales over the past five years, but remains well below its 2005 peak of $7.7 billion, according to The Music Trades magazine.

“The industry’s challenges have been compounded as the newest generation of teens has shifted its focus from guitars to consoles, smartphones and sports,” Reuters noted. “The electric guitar has been virtually absent from the Top 20 music charts in the past five years.”

S&P Global expects Guitar Center’s adjusted debt leverage to slightly improve to 9.4x in 2017 on modest EBITDA growth. Adjusted total debt to EBITDA was close to 10x  on Dec. 31, 2016. Adjusted EBITDA interest coverage is 1.3x.

As of March 14, 2017, the company has approximately $134 million of borrowing availability under its $375 million ABL revolver.