Guitar Center Creditors Push Back on Music Retailer’s Bankruptcy

(Bloomberg) -- Some creditors of Guitar Center Inc. have organized with the intent to vote against the retailer’s bankruptcy plan ahead of a critical deadline next week, according to people with knowledge of the matter.

Certain first-lien noteholders have signed a cooperation agreement and are raising questions about the legitimacy of a previous Guitar Center refinancing, the people said, asking not to be identified discussing a private matter. Their concerns center on new super-senior notes previously offered by Guitar Center to pay off existing obligations and avert a default by the largest U.S. retailer of music instruments and equipment.

The deal gave the new notes priority on certain collateral that was already pledged to existing first-lien notes, the people said. The dissident holders are evaluating whether the new pledge was allowed under existing debt documents, arguing that Guitar Center needed consent from each first-lien noteholder, rather than the simple majority that approved the transaction. They also object to being left out of participating in the new notes and the retailer’s bankruptcy loan.

The creditor group represents about 20% of Guitar Center’s first-lien notes outstanding, the people said. They’re pushing back on a restructuring plan that was already supported by holders of more than 70% of the notes, according to Guitar Center’s disclosures.

Deadline Approaches

Creditors have until Dec. 10 to comply with or object to the plan, and a hearing is scheduled for Dec. 17. A judge will ultimately decide if the objections are substantial enough to upend the existing bankruptcy plan.

A representative for Westlake Village, California-based Guitar Center declined to comment.

Guitar Center filed for bankruptcy in November after the coronavirus pandemic kept customers at home and job losses made them less able to afford new gear. It listed about 300 stores across the U.S., and sister brands include Music & Arts, with more than 200 stores specializing in band and orchestral instruments for sale and rent.

The creditor group, represented by law firm Akin Gump Strauss Hauer & Feld, includes HPS Investment Partners, 400 Capital Management, LMR Partners, HG Vora Capital Management, Three Court and Tresidor Investment Management, the people said. Representatives for Akin and the various investment firms either declined to comment or didn’t immediately provide comment.

Discussions with Guitar Center and other creditor groups are ongoing, and the dissenters could shift to supporting the plan pending the outcome of negotiations, the people said. A separate group of first-lien noteholders is represented by law firm Stroock & Stroock & Lavan.

Fresh Funds

The company’s restructuring support agreement calls for new financing backed by existing creditors, plus $165 million in new equity from owner Ares Management Corp., as well as Carlyle Group Inc. and Brigade Capital Management.

Guitar Center also negotiated a $375 million debtor-in-possession loan provided by certain existing noteholders and lenders, court records show. Plans call for $335 million in new senior secured notes arranged by investment bank UBS Group AG.

At Guitar Center’s first hearing in front of U.S. Bankruptcy Judge Kevin Huennekens, Philip Dublin of Akin Gump told the judge certain noteholders he represented were likely to raise concerns with the plan and were excluded from participating in the new super-priority notes or debtor-in-possession loans.

The case is Guitar Center Inc., 20-34656, U.S. Bankruptcy Court, Eastern District of Virginia.

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