UPDATE: Nov. 23, 2020: Guitar Center filed for Chapter 11 bankruptcy on Saturday to execute a previously announced deal to refinance its debt, inject new liquidity and exit the court process before year's end. The deal includes $165 million in new equity investments from Ares Management, its private equity sponsor, as well as new investors including The Carlyle Group and Brigade Capital Management.
- Guitar Center plans to file for Chapter 11 and be out by the end of the year, the retailer said in a press release.
- The filing is part of a restructuring agreement with key stakeholders, including its private equity owners and "supermajorities" of bondholder groups. The deal would cut $800 million in debt from Guitar Center's books and add $375 million in new liquidity.
- Once it files, the company expects business and payments to vendors to continue uninterrupted. The retailer said it is "pleased" with its store footprint but has hired advisers to evaluate its real estate portfolio for possible closures.
Guitar Center has already dodged bankruptcy once this year, after missing interest payments on a group of bonds. The retailer at the time was able to work out a deal with bondholders that allowed it to preserve its cash while it tried to survive the disruption from the COVID-19 pandemic. But analysts expected more restructuring down the road, and in recent weeks rumors and media reports have pointed to a possible bankruptcy.
In its press release, the retailer outlined a relatively quick trip through Chapter 11 that would allow it to shed debt leftover from multiple private equity buyouts and give it much-needed liquidity.
According to Guitar Center, it already has the creditor support for its restructuring plan that it would need to pass it in a bankruptcy process. It also has $375 million in debtor-in-possession financing lined up to fund it through Chapter 11 and plans to raise $335 million in new senior secured notes that would give the company additional liquidity.
Its bankruptcy and deal with lenders would, according to Guitar Center, put it back on the track for growth it was on before COVID-19. "With ten consecutive quarters of growth prior to the impact from COVID-19, we have been pleased with our resilient financial performance during these challenging times created by the pandemic," Guitar Center CEO Ron Japinga said in the release. He added that post-Chapter 11 the retailer "will be better equipped to execute on and invest in our strategic growth initiatives."
Included in the deal are Guitar Center's private equity sponsor, Ares Management, as well as new equity investors Brigade Capital Management and The Carlyle Group, along with bondholders.
For retail companies especially, going into bankruptcy court with a firmed-up, specific and orderly plan is key to a smooth process and exiting from Chapter 11 intact. That Guitar Center has stakeholder support for its deal bodes well for the process. It also signals that those stakeholders see value in the musical instrument retailer, which has struggled under its debt load for years as the industry around it has shifted.