Guitar Center and its creditors are discussing reorganization under Chapter 11 as a possible way to relieve the company’s debt load, according to the New York Times, which cited sources familiar with the situation.
The musical instrument retailer, one of the Valley region’s largest private companies, reportedly missed a $45 million interest payment in early October that would’ve gone towards bonds due in 2021 and 2022.The missed payment set off a 30-day grace period that will expire in the middle of this month, the Times reported. Guitar Center could file for Chapter 11 during that time, or the forbearance could be extended to allow for negotiations to continue.This isn’t the first time in 2020 Guitar Center has flirted with a Chapter 11 filing.
After missing a bond interest payment in April, the company narrowly avoided a default by reaching a refinancing agreement with bondholders to sell nearly $33 million in new senior secure notes and use that capital to cover debt that had come due.
The New York Times said the parties are considering a similar deal to once again stave off a Chapter 11 filing in the short term.
If the company does undergo reorganization, the report said, it’s possible that certain stakeholders could exchange debt for more equity in Guitar Center.The Westlake Village company has long struggled to get its debt under control, a battle that has been exacerbated by the pandemic’s damage to the retail sector.In-store sales were nonexistent between March and July when regulations temporarily closed Guitar Center’s roughly 300 stores in the U.S. The company responded by furloughing more than 9,000 of its 11,000 employees and reducing its spending habits, but leverage remained high. Moody’s Investors Service downgraded the company’s credit rating several times this year.
Guitar Center is owned by private equity firm Ares Management in Los Angeles, which in 2014 gained a controlling interest in the retailer through a debt-for-equity swap with previous owner Bain Capital. Bain had bought Guitar Center in 2007 and took it private for $63 a share. Guitar Center took on a $650 million term loan, $750 million in notes and a $375 million credit facility, leaving the retailer with around $1.6 billion in debt.
Then came the Great Recession, which, coupled with the meteoric rise of e-commerce giant Amazon.com Inc., squeezed profits at Guitar Center and other equipment retailers.Bond and loan payments piled up and Bain eventually handed off ownership to Ares, maintaining a minority share.Ares Management also happens to be the controlling stakeholder in California Resources Corp., an oil and gas provider in Santa Clarita that filed under Chapter 11 in June. Weeks before the company’s filing, anonymous sources familiar with the situation had notified major news outlets that the entities were discussing a reorganization plan.