Guitar Center
Gets Relief, for Now

Guitar Center Inc., the largest retailer in the musical products industry, received some fiscal flexibility in April by completing the restructuring of nearly $1 billion in bond debt that was scheduled to come due in 2019 and 2020. By doing so, the company bought breathing room into 2021 and 2022 to continue operations and find a long-term debt solution.

The majority of GC's debt comes in the form of two bond issues. In March, the company issued $635 million in 9.5 percent senior secured notes due in 2021, using the proceeds as well as the company's asset-based revolving credit facility to redeem $615 million in 6.5 percent senior secured notes due in April of 2019.

GC also successfully exchanged $325 million in 9.625 percent senior unsecured notes due in 2020 for new 5 percent cash/8 percent payment in kind notes due in 2022. With those notes investors received warrants to purchase shares of common stock in Guitar Center Holdings, the parent company of Guitar Center.

Senior secured notes are debt that has priority over types of debt and is secured by collateral. Unsecured notes don't have that backing.
At settlement, GC issued $317,957,000 in exchange notes and paid an early tender consideration of just over $1.5 million as well as support party fees of just over $1.5 million.

The company also extended the maturity of its $375 million asset-based revolving loan to 2023 from 2019.

Upon completion of the moves, Moody's Investor Service upgraded Guitar Center's bond rating, but signaled that it viewed the $325 million bond exchange as "an event of default under its definition of default," according to an April 17 press release. The release also noted, "The rating outlook remains negative" for the company.

In Moody's view, "despite recent operating margin improvements and the near-term flexibility afforded by the exchange, GCI remains very highly leveraged with pro forma debt/EBITDA on a Moody's adjusted basis at about 6.2 times, and has a long-term debt balance (excluding amounts from the ABL facility) that will increase as the 8 percent PIK portion of the senior unsecured notes accrues to the company's debt balance. As a result, GCI's ability to reduce leverage to below 6.0 times by 2020, about one year prior to the proposed senior secured note maturity date, will be largely dependent on the company's ability to grow its EBITDA by at least 5 percent annually until then."

Moody's gave positive consideration to GC's market position, brand awareness and product diversification.

With the exchange, the company has no material scheduled debt maturities until 2021. Moody's also "expects GCI will generate sufficient cash flow during the next 12 to 18 months to cover all of its debt service and capital expenditures."

With the restructuring, Moody's currently lists GC's corporate family bond rating at Caa, with a Caa1 senior secured note rating and a Caa3 senior unsecured note rating. According to Moody's, obligations rated at the Caa level are judged to be speculative and "subject to very high credit risk."

— By Frank Alkyer