Guitar Center, the country’s largest retailer of musical instruments, has filed for bankruptcy to reduce its $1.3 billion debt load amid a liquidity crisis caused by the coronavirus pandemic.
The Chapter 11 filing is the “next step” in implementing a restructuring agreement with creditors that will lower Guitar Center’s debt by about $800 million, the company said in a news release.
Lenders have also agreed to provide $375 million in financing to keep Guitar Center operating during the bankruptcy process. The company, which is owned by private-equity firm Ares Management, was facing the maturity of about $1.0 billion of secured debt next year.
“This is an important and positive step in our process to significantly reduce our debt and enhance our ability to reinvest in our business to support long-term growth,” CEO Ron Japinga said.
Guitar Center has more than 500 stores nationwide and generated more than $3.2 billion in revenue in fiscal 2019. According to The New York Times, its business was threatened before the pandemic by online rivals like Sweetwater and the company was heavily indebted as a result of a private-equity led buyout in 2007.
But in a court declaration, CFO Tim Martin said Guitar Center racked up 10 straight quarters of comparable store sales growth before the pandemic.
The company “was proactively engaging with creditors to deleverage its capital structure and extend its debt maturities to build a healthier balance sheet,” he said, but the closure of its stores due to COVID shutdowns “resulted in a significant decrease to net sales and adjusted EBITDA during the first quarter.”
“The liquidity constraints caused by [Guitar Center’s] significant debt burden and upcoming maturities, coupled with the economic upheaval created by the persistence of the COVID-19 pandemic, could not be resolved through short-term measures,” Martin explained.
In addition to the $375 million in debtor-in-possession financing, the restructuring includes an equity infusion of up to $165 million from Ares, the Carlyle Group, and hedge fund Brigade Capital Management, and a capital raise of $335 million in new debt.