Looks like Guitar Center is in some money Trouble

[tazzboy]

http://www.reuters.com/article/2012/...NA678920120508

Tue May 8, 2012 3:34pm EDT
Overview
-- U.S. musical instrument retailer Guitar Center is facing a $134.7
million applicable high-yield discount obligation (AHYDO) payment in April
2013 and its Holdco notes are also becoming cash interest pay in 2013.
-- We believe the company will have to borrow under its revolver to meet
its financing and operating needs during 2013 and that cushion to its senior
leverage covenant will likely narrow to about 10%
-- We are re-assessing Guitar Center's liquidity profile to "less than
adequate" and revising our ratings outlook to negative from stable.
-- We are also affirming all existing ratings on the company, including
our 'B-' corporate credit rating.

Rating Action
On May 8, 2012, Standard & Poor's Ratings Services revised its ratings outlook
on Westlake Village, Calif.-based musical instrument retailer Guitar Center
Holdings Inc. to negative from stable. At the same time we affirmed all
existing rating on the company, including our 'B-' corporate credit rating.

We rate subsidiary Guitar Center Inc.'s $375 million revolver due 2016 'B+'
with a recovery rating of '1', indicating our expectation for high (90% to
100%) recovery in the event of a payment default. We rate the company's $650
million term loan due 2017 'B-' with a recovery rating of '3', indicating our
expectation for meaningful (50% to 70%) recovery of principal in the event of
a payment default.

In addition, we rate both Guitar Center Inc.'s $375 million cash
interest-paying senior unsecured notes due 2017 and Guitar Center Holdings'
$401.758 million senior unsecured notes due 2018 'CCC'. Both notes have a
recovery rating of '6', indicating our expectation for negligible (0% to 10%)
recovery in the event of a payment default.

Rationale
Our ratings on Guitar Center reflect our assessment that the company's
liquidity is "less than adequate" but sufficient to avoid a default within two
years.

The March 2011 amendment of the company's capital structure allowed it to
accrue 50% of interest on the Holdco notes for the next four payment periods,
the last being in October 2012. Subsequently, the company will have to pay
cash interest on these notes with the first payment due in April 2013. In
addition, Guitar Center must make a $134.7 million AHYDO payment in April
2013. This cash payment represents accrued payment-in-kind (PIK) interest of
$189.7 million on the company's Holdco notes that has been added to the
principal, minus the first payment that the company made in the amount of $55
million. As such, we believe the company will have to borrow under its
asset-based loan (ABL) revolver to meet its financing and operating needs
during 2013. In our view, this will result in cushion to its net senior
leverage covenant narrowing to about 10%.

We view Guitar Center's financial risk profile as "highly leveraged,"
reflecting its high debt levels resulting from 2007 LBO transaction and weak
cash flow protection measures. Although debt leverage decreased to about 8.9x
at Dec. 31, 2011 from about 9.5x a year earlier, we anticipate that leverage
will remain elevated due to additional borrowings under the company's ABL
revolver. Also, we anticipate that EBITDA coverage of interest will remain
thin, at about 1.1x.

We view Guitar Center's business risk profile as "fair," reflecting its
operational weakness during the latest economic downturn, offset by recently
modestly improving profitability and its leading position in the highly
fragmented and competitive music products retail industry. Although recent
operational difficulties for Direct response segments were due to the
headquarter relocation and Web redesign, we anticipate that increasing
e-commerce competition will continue to challenge this segment of the
company's operations.

As such, our specific assumptions for Guitar Center include:
-- Sales growth in the mid-single-digit percent due to modest same-store
sales and incremental revenues from newly opened stores offset by weaker
performance at the Direct Response segment;
-- Modest EBITDA margin improvement as incremental costs to support new
store growth offset benefits from sales leverage;
-- Increased capital expenditure to support the opening of 10 to 20 new
stores;
-- Exercise of the PIK feature on the Holdco notes during the October
2012 payment period;
-- The company makes the $134.7 million AHYDO payment in April 2013; and
-- The company will be free operating cash flow (FOCF) negative during
2012 and 2013.

Liquidity
Liquidity is less than adequate in our view. Our assessment incorporates the
following factors:
-- The likelihood that Guitar Center will not be able to absorb
low-probability adversities;
-- We expect the ratio of the company's sources of liquidity to its uses
to be less than 1.2x during 2013; and
-- We also expect that cushion to the company's net senior leverage
covenant will narrow to about 10% during 2013

Liquidity sources at Dec. 31, 2011 consisted of $106 million of cash and about
$289 million available under its $373 million ABL facility. During September
2011 and subsequent to the Dec. 31, 2011 fiscal year-end, Guitar Center
obtained a commitment to extend till February 2016 about $70 million of its
$120 million non-extended portion of the ABL revolver. The remaining $50
million matures at the original date in October 2013.

The company's term loan matures in April 2017, the senior notes in October
2017, and the Holdco notes in April 2018.

We anticipate the company to be FOCF negative during 2012 and 2013.

Recovery analysis
For the complete recovery analysis, see the recovery report on Guitar Center,
to be published following the release of this report on RatingsDirect.

Outlook
Our rating outlook is negative and reflects our less-than-adequate liquidity
assessment. We anticipate the company will have to borrow under its revolver
to meet its financing and operating needs during 2013. We therefore believe
that cushion to the company's senior secured leverage will narrow to about
10%.

A downgrade could occur if lower-than-expected EBITDA growth leads us to
believe that the company could breach its financial covenants.

Although unlikely in the near term, a positive rating action would entail our
reassessment of liquidity back to "adequate" and leverage decreasing toward
6x.

Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Ratings Criteria: Ratios And Adjustments, April 15,
2008

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action
To From
Guitar Center Holdings Inc.
Corporate Credit Rating B-/Negative/-- B-/Stable/--

Ratings Affirmed; Recovery Ratings Unchanged

Guitar Center Holdings Inc.
Guitar Center Inc.
Senior Unsecured CCC
Recovery Rating 6

Guitar Center Inc.
Senior Secured revolver B+
Recovery Rating 1
Senior Secured term loan B-
Recovery Rating 3

Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.

[boris bubbanov]

Fascinating.

This means, if the US economy goes into another big dump in the next 12 months, GC will default and there's no good "backup" source of payment. (Btw I don't see the economy doing this).

What I don't think it means is, stores will start closing tomorrow. They probably should close 10 underperformers but won't do so because of the PR impact that decision could create.

The arts and entertainment people, musicians and craftspeople have been taking it on the chin for about 30 years now, income and wealth wise. Musical instrument sales are not coming from musicians much anymore, but from real estate brokers, attorneys, dentists and the lucky sperm club.

Ah, well.

[emu!]

So, if I read that correctly...GC just had their credit rating downgraded?

meh...happened to the majority of people already...AND the US government. No biggie. If they do go belly-up though...I'm standing in line for the close-out sale.

[Freejack]

And computer geeks like me... Sorry we had the same problem with motorcycles in the 80's and 90's. That's why Harley's had such a high cost. Check the resales where a 10 year old bike has 5,000 miles.

I guess I can take heart that I'm actually learning and don't just have it sitting in a case in my closet or something.

Carl

[uriah1]

Sounds like another big box store (MARS)

[Arbiter]

And people ask why I wouldn't dream of buying Fender stock.

If GC went down (and they've been in trouble for quite some time and it's been obvious to me, as a customer) Fender is totally screwed.

[StratBluesRock]

Interesting. I know Daddys Junky Music went under but I don't think GC will any time soon.

[sax4blues]

Originally Posted by emu!

If they do go belly-up though...I'm standing in line for the close-out sale.

I can just see the threads now: "I went to GC close out and they only marked things down 15% I offered them 1/2 for a Tele off the rack and the guy just walked away I'm never going back there

[bossaholic]

This is what I find troubling.

For the last 20 or so years, these mega corporations destroyed the mom and pop industry, leaving virtually every town and city completely dependent on the box stores.

Now these box stores are in financial trouble (no competition to keep them on their toes) so they start closing stores, leaving towns destitute.

Here in Ft. Wayne, Blockbuster closed all of the stores around me and since there are very few independently owned rental stores, I can't even rent a movie now (unless I drive waaay out of my way), something I never would have thought would happen.

People are still going to want to buy guitars and gear. Could it be the time is now right for the independent boutique manufacturers to team up with independent music stores??

If Fender had any sense, they would start cultivating this idea and instead of shunning the Mom and Pops, start developing a relationship with them, like Leo did. It was the Mom and Pops who put Fender on the map, not Guitar Center.

[upinthemteles]

Originally Posted by bossaholic

This is what I find troubling.

For the last 20 or so years, these mega corporations destroyed the mom and pop industry, leaving virtually every town and city completely dependent on the box stores.

Now these box stores are in financial trouble (no competition to keep them on their toes) so they start closing stores, leaving towns destitute.

Here in Ft. Wayne, Blockbuster closed all of the stores around me and since there are very few independently owned rental stores, I can't even rent a movie now (unless I drive waaay out of my way), something I never would have thought would happen.

People are still going to want to buy guitars and gear. Could it be the time is now right for the independent boutique manufacturers to team up with independent music stores??

If Fender had any sense, they would start cultivating this idea and instead of shunning the Mom and Pops, start developing a relationship with them, like Leo did. It was the Mom and Pops who put Fender on the map, not Guitar Center.

The blockbuster thing is a whole other issue altogether, with online streaming and netflix and all of it. They should still have red box in that area though?

[goldtopper]

Still a better credit rating than the USA.

[bluebilly]

I am a former GC operations mgr and all I have to say is: ....... DUH. It's only a mater of time. Mark my words.

[Toto'sDad]

I hope they make it. I like 'em, most likely though, it will come to pass, and another thing I like to do will bite the dust. Even though they are big box, you can still deal with 'em. You can't go to WalMart and "make an offer" on anything. I like the whole thing at GC the looking, the excitement of buying, the trading, and dickering. I REALLY hate to see it go.

Maybe I'll get on down there and pony up for something for old times sake. I think I'll need a closet stretcher, maybe they have one of those, nah, that's home depot.

[Kyluckyman]

I don't like the owner so I have no qualms about negotiating a hard deal or lowballing on used gear that's been on the wall for several months.

As I see it, it the economy picks up and people have more real disposable income, the sale of musical instruments will strengthen. The key will be seeing salaries increase with realtively low inflation. However, if Greece goes down the tubes and takes Europe with it, I think that will cause our economy to stall and GC will feel a lot of pain.

[Kyluckyman]

It just occured to me Martin, Fender, etc. ought to require cash up front from GC.

[diffeecult]

Quote:
-- We believe the company will have to borrow under its revolver to meet
its financing and operating needs during 2013 and that cushion to its senior
leverage covenant will likely narrow to about 10%

If they're in bad enough shape to need a revolver to get money then I don't see much hope.

[E5RSY]

Originally Posted by boris bubbanov

What I don't think it means is, stores will start closing tomorrow. They probably should close 10 underperformers but won't do so because of the PR impact that decision could create.

Austin has three GC stores, which is about two too many. A town like Austin doesn't exactly need GC, yet we have a handful.

[rangercaster]

musicians make up less than 10% of the population ... it's a small market to aim for ... Amazon sells books and music ... everybody reads and most people listen to music ...

[Bones]

That Ridiculous "king of the Blues" contest is killing them.

[E5RSY]

Originally Posted by rangercaster

Amazon sells books and music ... everybody reads and most people listen to music ...

They also sell just about everything available at Guitar Center.