UPDATE: May 18, 2020: Guitar Center has addressed its April 2020 debt payments, reported to be late, through a series of transactions that had the support of the company’s lender groups, according to a Friday press release. The company said the transactions provided additional near-term liquidity to help it navigate the COVID-19 crisis.
"We believe that with these transactions and the staged reopening of the country along with our pre-pandemic positive business performance, we are well positioned to meet these challenging market conditions," Guitar Center CFO Tim Martin said in the release.
- Guitar Center skipped interest payments on two groups of bonds, Bloomberg reported Monday citing anonymous sources.
- The missed payments put the musical instrument retailer into a 30-day grace period as it negotiates with creditors. A spokesperson for Guitar Center declined Retail Dive's request to comment on the Bloomberg report.
- According to Bloomberg, Guitar Center, with $1.2 billion in debt as of February and $3 million in cash, is working with investment bank Houlihan Lokey and lawyers at Stroock & Stroock & Lavan as it tries to negotiate a deal with its lenders.
Even before the COVID-19 pandemic slammed retailers, Guitar Center struggled with financial constraints from its debt load, left over from two private equity buyouts executed within a decade of each other.
In February, well before the mass waves of store shutdowns and stay-at-home orders, interest was eating into Guitar Center's earnings. The retailer faced "elevated risk" of debt restructuring, according to Moody's, which downgraded the retailer at the time.
Analysts led by Raya Sokolyanska said then that Guitar Center's liquidity remained "adequate," but the company leaned heavily on its revolver for cash, leaving "limited remaining availability in the peak seasonal borrowing period," Sokolyanska said.
Much has happened since then. Guitar Center, along with most of the discretionary retail universe, has temporarily closed most of its stores. It has kept some stores open, in the few areas where the retailer was deemed by local officials to be essential. According to Music Trades, the company has also furloughed 9,000 employees as it deals with the lost revenue.
For Guitar Center, the closures don't just mean the loss of product revenue. Instrument lessons are a mainstay of the company. Guitar Center has tried to adapt by offering lessons online. But Guitar Center CEO Ron Japinga said in a letter obtained by Music Trades that the company's digital business and call centers "do not make up for the significant impact from our store closures."
In the letter, Japinga said the negative impacts of the COVID-19 pandemic had been dramatic and would continue to impact the company. He acknowledged that more "difficult decisions" were likely ahead.
Like Neiman Marcus and J.C. Penney, which also have missed debt payments this month, Guitar Center is likely bound for restructuring, whether in bankruptcy or out-of-court.
Underneath Guitar Center's debt, there could be a viable business there. Sokolyanska noted in February that Guitar Center enjoys a "leading market position and very strong brand awareness within the highly fragmented specialty retailing segment for musical instrument sales and rentals." It has also improved its revenue and earnings in recent years.