AUG. 28 I GIBSON I RATING ACTION
Moody's Downgrades Gibson Bond Rating

Moody's Investors Service downgraded Gibson Brands, Inc.'s Corporate Family bond rating, pushing it deeper into the "junk" category. In a report released Aug. 17, the rating action was due to Moody's "concern with Gibson's weak operating performance, liquidity pressure from approaching maturities, and the view that the company's capital structure is unsustainable. The rating outlook is negative."

Gibson's rating was downgraded to Caa3 from Caa2. Its Probability of Default Rating dropped to Caa3-PD from Caa2-PD, and senior secured notes to Ca from Caa3.

"We feel that Gibson's capital structure is unsustainable due to the uncertainty over its ability to refinance debt that comes due in July 2018 and August 2018 given its very high leverage and weak operating performance," said Kevin Cassidy, senior credit officer at Moody's Investors Service. Debt/EBITDA is approaching 10 times. "Despite our expectation of debt reduction over the next year with the expected proceeds from asset sales, we think debt/EBITDA will remain high at around 8 times."

Moody's said it expects Gibson to significantly decrease its cost structure over the remainder of the year. This should eventually lead to sustained margin improvement, although there was uncertainty about the timing of when the benefits would be realized.

"We expect EBITDA to remain essentially flat this year as we think margin enhancements will not be enough to offset revenue declines," Cassidy said. Moody's expects a significant decrease in revenue this year as the company reduces the number of SKUs in the audio business and deals with the lingering effects of supply shortage issues that began in the first quarter of the fiscal year ended March 2018, new government regulations for certain wood products, and long-term secular pressure on guitar volumes in the Musical Instrument business.

The bulk of Gibson's debt matures in 2018. Gibson's $375 million of outstanding senior secured notes mature Aug. 1, 2018, and $145 million of outstanding secured bank loans are due July 23, 2018, if the notes are not refinanced by that date.

Headquartered in Nashville, Tennessee, Gibson designs, manufactures and distributes Gibson, Philips, Epiphone, Kramer, Baldwin, Onkyo, KRK, and Stanton. The company has annual revenues of approximately $1.2 billion, according to Moody's.