Guitar Center Debt Restructuring Looms After Skipped Payments

(Bloomberg) -- Guitar Center Inc., the largest U.S. retailer of music instruments and equipment, is trying to work out a deal with its creditors after skipping payments on two of its bonds, according to people with knowledge of the matter.

The chain failed to pay interest on its unsecured bonds due 2022 and first-lien bonds due 2021, the people said, asking not to be identified discussing a private matter. It’s seeking advice from investment bank Houlihan Lokey Inc., which served as Guitar Center’s financial adviser on past efforts to rework its debt, the people said.

The April 15 missed coupon payments triggers a 30-day grace period before a formal event of default takes effect. Guitar Center is using that period to negotiate with its creditors after coronavirus shutdowns crimped sales and cash levels. Lawyers at Stroock & Stroock & Lavan are working on behalf of certain debt holders, the people said.

A representative from Guitar Center, which is based in Westlake Village, California, declined to comment. Houlihan Lokey and Stroock didn’t immediately provide a comment.

Guitar Center has 300 stores across the U.S. and has continued to open up locations over the years. Its sister brands include Music & Arts, which operates more than 200 stores specializing in band and orchestral instruments for sale and rent.

The coronavirus shutdown has hit hard at retail chains, which were already under pressure before the pandemic from online behemoths like Amazon.com and falling foot traffic at shopping centers. Guitar Center tried to diversify by offering repairs and music lessons, which are continuing online through video services, one of the people said.

Guitar Center listed $1.2 billion debt as of February, with roughly $3 million of cash on its balance sheet, the people said. It told investors on a call to discuss fourth-quarter results last month that it drew on its $375 million revolver as a precautionary measure in response to the pandemic, the people said.

The company may have to restructure its borrowings as leverage remains high and cash flow is limited, even after two previous distressed exchanges, Moody’s Investors Service said in February. The ratings firm downgraded the retailer to Caa2 from Caa1, citing the higher likelihood of a debt restructuring.

Guitar Center’s debt is trading at a significant discount to its face value. Its roughly $318 million of unsecured bonds due in 2022 are trading at about 42 cents on the dollar, according to Trace bond trading data. The first-lien notes due 2021 trade around 70 cents.

Ares Management LP gained control of the company in 2014 through an out-of-court restructuring of Guitar Center’s borrowings. Its heavy debt load and financial pressures date from a 2007 deal by Bain Capital LP to take it private for $2.1 billion.

©2020 Bloomberg L.P.