Moody's Downgrades Guitar Center's Ratings

Moody's Investors Service downgraded Guitar Center Inc.'s ratings. In a report released Nov. 28, the rating action was due to Moody's concerns "regarding GCI's significant and relatively near-term debt maturities. Excluding the company's $375 million asset-backed loan facility, approximately 65 percent of the company's long-term debt matures in April 2019 ... The rating outlook is negative," according to the report.

Guitar Center's Corporate Family Rating was downgraded to Caa1 from B3, and its Probability of Default Rating was downgraded to Caa1-PD from B3-PD.

"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," said Keith Foley, a senior vice president at Moody's Investors Service. "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."

Moody's said Guitar Center is currently in negotiations to refinance its outstanding debt and still has time to refinance these debt obligations. Moody's expressed concerns that the "more compressed that time period becomes from this point on, the more challenging it will be for the company to address its debt maturity profile."

The report continued to state that Guitar Center's ratings could be lowered if, for any reason prior to maturity, the company executes a refinancing in a manner that involves impairment to existing lenders — something that Moody's would deem to be a distressed exchange — or if it appears that Guitar Center won't be able to refinance is near-term debt maturities by the end of March 2018, approximately one-year before the company's $615 million, 6.5-percent senior secured notes come due. The degree and timing of any downgrade depends on Moody's assessment of Guitar Center's refinancing plans and opportunities at various points going forward.

"The rating outlook would be revised back to stable if GCI is able to push out its debt maturities prior to maturity without any impairment to creditors. A higher rating is possible over the long-term, but would also require that GCI, materially improve its credit metrics — achieve and maintain lease-adjusted debt/EBITDA of at least 4.5 times and EBIT/interest at or above 2.5 times," according to Moody's.

Guitar Center's $375 million asset-based credit facility (not-rated) matures on April 2, 2019. The company's $615 mil 6.5 percent senior secured 1st lien notes mature on April 15, 2019. Guitar Center's $325 million 9.625 percent senior unsecured notes do not mature until 2020.

According to Moody's, Guitar Center is the largest retailer of music products in the United States based on revenues. Guitar Center is a wholly-owned subsidiary of Guitar Center Holdings, Inc. The company has three reportable business segments, comprised of Guitar Center, Musician's Friend and Music & Arts. Guitar Center is a private company and does not publicly disclose detailed financial information.