US instrument retailer Guitar Center has had its bond credit rating downgraded from ‘stable’ to ‘negative.’ The rating change was made by ratings agency Moody’s, which noted that despite modest growth for the retailer recently, Guitar Center is carrying too much debt.
Moody’s vice president and lead analyst for Guitar Center, Raya Sokolyanska, said of the change: “While Guitar Center has reported modest growth in comparable sales and EBITDA over the past three years, and is a solid operator with a leading position in the niche musical instruments space, leverage remains high and cash flow is limited even after two distressed exchanges.”
Retail specialist website Retail Dive offered the following analysis on the downgrade: “Profits before interest and taxes are growing, if slowly, and Moody’s noted projections of comparable sales growth in the low to mid-single digits, which is better than a lot of the retail world. But still, the firm noted that is not enough to reduce Guitar Center’s debt load over the next 12 to 18 months. Moreover, the company is heavily dependent on its asset-based revolver ‘and will have limited remaining availability in the peak seasonal borrowing period,’ according to Moody’s.”
Retail Dive also noted that the current debt is “a holdover from leveraged buyouts over more than a decade. The retailer was first acquired by private equity firm Bain Capital, and then Ares Management took control in 2014 in a deal aimed at reducing Guitar Center’s debt.”
WSJ Bankruptcy has also commented on the situation, suggesting that Guitar Center may face yet another debt restructuring given the nature of the music instrument retail industry, and the difficulty low-margin/high-cost operations have in servicing debt.
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