Music Trades — May 2011
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Guitar Center Works To Delay Debt Repayments

Guitar Center Asks To Defer Interest Payments

GUITAR CENTER HAS approached lenders to extend the maturities of its $650 million secured debt by 2.5 years to April 2017. As an inducement, the retailer has agreed to a 1.5% increase in the interest rate to 500 basis points over Libor (London Interbank Offered Rate). The amended effective borrowing rate would be approximately 9.9%. The company has also asked to defer 50% of the interest payments on another $622 million term loan for 18 months.

According to Moody's Investors Services, this combination of amendments and extensions "provide default avoidance." A Moody's report concluded, "Ratings continue to reflect Guitar Center's unsustainable capital structure over the long term at current levels of operating performance, given the sizable level of operating income growth needed to bring leveraged and interest coverage to more reasonable levels." A Moody's analyst concluded that growth in sales, comparable store sales, and profits will not be sufficient to trim the company's approximately $1.6 billion debt load to a more manageable level. However, they conclude, "Guitar Center's liquidity is, and is expected to remain, good," given that there are no sizable debt payments due until April 2013.

Separately, Moody's noted that with annual revenues of $2 billion, Guitar Center's current earnings before interest, taxes, depreciation and amortization (EBITDA), estimated at $170 million, is insufficient to cover its interest burden, and that "operating performance will only modestly improve."