Guitar Center had its credit rating downgraded again as its notes have fallen even lower into junk bond territory. Moody’s decreased its rating for GC from Caa1, which was already low, to Caa2, which it considers “highly speculative,” and “reflects the risk that the company may not be able to refinance its debt at par in an economical fashion in advance of the maturities becoming current.”
According to Moody’s, “The downgrades reflect the rising probability of a balance sheet restructuring as a result of GCI’s approaching 2021 maturities, high leverage and limited cash flow generation.”
To be sure, Guitar Center still actually has very good revenue and is doing better than a lot of major retailers, but as Moody’s points out, it’s still not enough to overcome its huge debt load. Couple that with the fact that the Coronavirus has shut down many foreign suppliers which will eventually limit the availability of popular products for GC to sell, and you have a combustible combination.
To the company’s credit, it was able to survive two critical financial situations by securing last minute financing in recent years, and if you just looked at the company from a retail sales perspective, it appears to be doing well.
The problem is the holdover debt from leveraged buyouts over more than a decade when it was was first acquired by private equity firm Bain Capital, and then Ares Management took control in 2014 in a deal aimed at reducing Guitar Center’s debt. It’s been an uphill battle ever since.
I’ve talked to many manufacturers recently who’ve spoken highly about the current GC management and how business is conducted, which is a change from recent years. To be sure, none of the current financial problems are a result of most of its current executives. That doesn’t mean that there isn’t a problem however, and any supply shortages brought on by the Coronavirus epidemic will only exacerbate the situation. But a low credit rating severely impedes the company’s borrowing power when it needs it.
Keep an eye on this one, because the story could change quickly.