Guitar Center Problems

[vsaumarez]

New to you perhaps but not really a new story. And it's not the LBO. That basically failed in 2014. It's the take over by their creditor that's driving the show. For several years before the Ares takeover, the interest rate they were being forced to pay on their new borrowing was about what you'd pay on credit card debt. I would assume the that the junk rating means is that the investor community suspects that Ares may at some foreseeable point consider pulling the plug or likely sell the assets in a fire sale.

According to Wikipedia, Standard and Poors had already downgraded GC to junk status in 2013. The report I read was from MarketWatch (April 2017) that says the latest potential downgrade to 'junk' is from Moodys. The Ares takeover was through a debt to equity swap, which according to the LA Times cut GC's funding costs dramatically. However, Moodys reports that significant amounts ($1.6 billion) of debt remains and $65m of that matures in the next two years. With dwindling sales that becomes a problem. Leverage ratios might show what impact the equity swap had, but it sounds like this was not as significant as reported so was possibly just to keep lenders at bay. Debt has a nasty habit of hanging around.

[vsaumarez]

I understand why think this feels so much like some combination of Chicken Little and the Boy Who Cries Wolf, but the truth is that Guitar Center has already failed once. That's basically what happened in 2014 when majority ownership was taken over by Ares. That was the corporate equivalent of having your car repossessed or losing your house to the bank.

That might depend on your definition of 'failed'. Was GC technically insolvent? Probably. Did it file for bankruptcy and/or cease trading? It is still a trading entity as far as we know. I will keep digging for info, but on the surface this looks like a classic LBO disaster, and Ares merely pushed the problem (over-levered) down the road.

[Bluedawg]

So if they go out of business, do I still have to pay off my Synchrony Guitar Center card?


LOL

I'm guessing the answer is a big YES.

[sgosnell]

GC had a 1978 Benedetto 7-string hanging on the wall in CA for years, at a very high price. Eventually they put it into an employee auction, along with a thousand or so other instruments. My daughter got it for $4k as the only bidder, and it resold for about $13.5k. They could have sold it for a lot more than the $4k if they had tried at all. But I'm glad they did it that way. I needed a new roof about then.

[AlsoRan]

GC had a 1978 Benedetto 7-string hanging on the wall in CA for years, at a very high price. Eventually they put it into an employee auction, along with a thousand or so other instruments. My daughter got it for $4k as the only bidder, and it resold for about $13.5k. They could have sold it for a lot more than the $4k if they had tried at all. But I'm glad they did it that way. I needed a new roof about then.

Man, I sometimes wonder about Guitar Center's true business savvy. Especially after hearing so many stories like this. Maybe the corporate headquarters tie the hands of the individual stores, limiting them with the "wheeling and dealing" they will allow.

[Jim Soloway]

That might depend on your definition of 'failed'. Was GC technically insolvent? Probably. Did it file for bankruptcy and/or cease trading? It is still a trading entity as far as we know. I will keep digging for info, but on the surface this looks like a classic LBO disaster, and Ares merely pushed the problem (over-levered) down the road.

I'm going on three year old memories but my definition of failed was simply that the owners of company were forced to give up control to their number one lender. I see that as very much like having your car or your house repo'ed. It's probably not technically correct but it's the way it was portrayed at the time. Ares seemed to be looking for an exit strategy that would get them back whatever they could on their loans and keeping the company's doors open seemed to at least give them some shot.

[AlsoRan]

Article on Guitar Center's Woes...

Guitar Center, Inc.: Moody's Revises Outlook To Negative - BDC Reporter

[vsaumarez]

I'm going on three year old memories but my definition of failed was simply that the owners of company were forced to give up control to their number one lender. I see that as very much like having your car or your house repo'ed. It's probably not technically correct but it's the way it was portrayed at the time. Ares seemed to be looking for an exit strategy that would get them back whatever they could on their loans and keeping the company's doors open seemed to at least give them some shot.

I agree, the analogy is similar. The point is the debt is still a problem. I read Moody's report and they seem to be saying the way out for GC is to refinance these impending short maturities, but increased sales are needed to improve the interest cover, a ratio that measures EBIT to debt interest. So this more a threat of a downgrade and is a way of saying you are in the last chance bar. Reports are circulating that employee problems aren't helping sales.

[Bluedawg]

The one in Tucson on Broadway was busy last Saturday ... hope that means increased sales .....

Tucson also gets a lot of shoppers coming up from Mexico and the GCs get their share of that traffic

I doubt that can save the hole company if sales are down every where else

[BigDaddyLoveHandles]

The one in Tucson on Broadway was busy last Saturday ... hope that means increased sales .....

Tucson also gets a lot of shoppers coming up from Mexico and the GCs get their share of that traffic

I doubt that can save the hole company if sales are down every where else

Can't say that's a business model with longevity.

[rpjazzguitar]

I shop at GC in Concord CA.

They have a pretty big selection of gear. They will match any advertised price. The salesmen are musicians (not usually jazz players). And, perhaps most important, they will cheerfully refund the full purchase price of any gear returned within their return policy. There have been occasions where it took less time to get the refund than to buy the gear initially.

Assuming they have what I want, the refund issue is huge. I can't tell a thing about a guitar or amp from playing it in the store.

Also, they have separate soundproof (well, resistant, anyway) rooms for acoustic, nylon, high end guitars, PA gear, keys and drums. I still avoid hours when school is out, but it could be worse.