Guitar Center said Monday that it had exchanged some $56.4m in bonds due in 2022. This figure represents 90.7% of the principal of the bond group, and the announcement came after a missed interest payment in April. The disclosure of the debt exchange caused Moody’s and S&P Global to downgrade Guitar Center to default levels, and the groups viewed the transaction as distressed, given it fell short of the bonds’ initial terms.
While this deal saved Guitar Center from defaulting immediately and allowed them to retain some liquidity by shorting immediate cash payments S&P analysts said in a statement that the terms of the new bonds “are materially the same, but the nonpayment of cash interest provides lenders with less than the original promise, and we do not view the additional principal received as adequate offsetting compensation.”
The S&P went on to detail their belief that the additional principal provided by Guitar Center would not offset growing uncertainty regarding the payment of the deferred amounts. The S&P did raise Guitar Center’s credit rating from default to CCC later in May, though this is standard practice following a distressed exchange. All of this points to Guitar Center attempting to restructure its debt as maturities approach.
The retailer’s debt load has been lurking in the shadows for a long time, and as COVID-19 shutdowns forced Guitar Center to close it’s brick and mortar shops, it saw a stark decline in revenue. The closure of stores did not only mean the loss of product sales, but revenue generated from lessons was also lost.
Guitar Center CFO Tim Martin said in May, “We believe that with these transactions and the staged reopening of the country along with our pre-pandemic positive business performance, we are well-positioned to meet these challenging market conditions.”
As Guitar-Center’s loss of revenue from store closures continues, it’s unclear how they will navigate avoiding bankruptcy, and their negotiations with debtholders will likely be the determining factor for the companies future.