Guitar Center Gets Debt Deal to Stave Off Default Amid Closures

Guitar Center Inc. sold new bonds to help pay for some of its old debt as it fights to stay afloat during the pandemic with its stores shut.

The largest U.S. retailer of musical instruments and equipment sold about $32.5 million of new senior secured notes with a 10% coupon due 2022 to holders of its existing first-lien notes, according to people with knowledge of the arrangement. The company used the proceeds to pay the coupon on its existing first-lien notes due 2021, the people said, asking not to be identified discussing a private matter.

Guitar Center has fulfilled debt payments it skipped last month, ensuring it will stave off a default, Bloomberg reported. As part of the transaction, it exchanged $7 million of remaining senior unsecured notes due 2020 for about $5 million of previous first-lien notes, the people said.

A representative of Guitar Center, based in Westlake Village, California, declined to comment.

Discretionary Pain

Guitar Center has about 300 stores across the U.S., with sister brands that include Music & Arts, which operates more than 200 stores specializing in band and orchestral instruments for sale and rent. Most of its outlets remain shut.

The coronavirus shutdown has hit nonessential retailers hard, and Guitar Center is vulnerable because purchases of musical instruments are highly discretionary, according to a report last year by Moody’s Investors Service. The pandemic has cost more than 30 million Americans their jobs, and many who are still employed have seen their pay cut substantially.

The company got further breathing room through the recent transactions modifying existing debt agreements, including for its asset-based revolving credit facility, the people said. It also exchanged about $295 million of its 13% unsecured payment-in-kind notes for newly issued 13% unsecured PIK notes with a principal amount equal to roughly 108% of the notes it exchanged for, according to the people.

Store Reopenings

The retailer expects to report negative net cash flow of $95.6 million from April 6 until the end of June, Guitar Center said in private projections shared with investors. Liquidity for the 13-week period is expected to fall to $28.6 million from around $124 million at the end of March, people with knowledge of the projections said. That assumes $30 million of cash and undrawn revolver capacity.

Guitar Center expects stores to start reopening in July. Its rent and other expenses that have been deferred will be repaid over time, and the company said it expects to make its interest payments on notes and the asset-based lending facility in “the normal course,” said the people.

Department stores and specialty shops were already under pressure before the pandemic due to competition from online behemoths like Amazon.com and falling foot traffic at shopping centers. Guitar Center has diversified by offering repairs and music lessons, which have continued online through the shutdown via videoconferencing services.

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Katherine Doherty in New York at kdoherty23@bloomberg.net

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Peter Jeffrey

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