You can’t say we didn’t see this coming. For a number of years now, Guitar Center has been struggling with massive debt related to financial engineering, and now it appears to have finally caught up with the company.
Reports are that Guitar Center is now preparing for a bankruptcy filing as soon as November 15th after missing a $45 million interest payment earlier in the month. Let that sink in for a moment – $45 million in interest!
The missed payment set off a 30 day grace period to catch up, but not doing so could lead to a default, which means that bankruptcy is the next step. That said, GC averted a similar situation earlier in the year when it missed a payment in April, so the same scenario could happen again. That said, the credit rating agency Moody’s has downgraded GC’s rating 3 times this year alone.
Guitar Center has been around since 1957 and for the most part thrived until its leveraged buyout by Bain Capitol in 2007. Since then it’s been struggling with huge payments thanks to its $1.4 billion in current debt from the buyout. Bain made a bet that the company would continue to grow and establish itself in Europe (which never happened) but ran into 2008 financial crisis. The company is now owned by Ares Management which acquired a majority stake in 2014 from Bain by converting some of the debt it owned in the retailer into equity.
In the meantime, the company has furloughed 9,000 employees this year, mostly due to the pandemic.
I feel sorry for the smaller manufacturers who rely on GC for their sales if the company does file for bankruptcy. That could mean that many of those companies could be put out of business, which is not good for the industry.
You can say a lot of negative things about Guitar Center, but it’s better to have it than not. Now what could be better is more local mom and pop music stores, but in the face of the current economy don’t expect that to happen any time soon, even with a Guitar Center of reduced strength.
GC has pulled a financial rabbit out of its hat many times before. Let’s see if it does it again.
UPDATE: Guitar Center has exited bankruptcy and is currently chugging along, as you’d expect after re-organizing a large portion of its debt. Although the pandemic did it no favors, the company still remains viable, although that could still change in the future since you can’t really classify the company as healthy.