Guitar Center Inc., the largest musical instrument retailer in the U.S., said it expected to file for bankruptcy after reaching an agreement to restructure its debt.
The plan will include as much as $165 million in new equity investments from funds managed by its private equity ownerAres Management, as well as the Carlyle Group and Brigade Capital Management, the company said in a statement Friday. It also aims to reduce debt by almost $800 million — it will get $375 million in financing from certain existing noteholders and lenders, and $335 million in new senior secured notes.
“As a result of this financial restructuring process, we will be better equipped to execute on and invest in our strategic growth initiatives and we will continue delivering through the strength of our brands, availability of our stores, customer-focused associate relationships, innovative music education programs and our expanding digital solutions,” Ron Japinga, chief executive officer of Guitar Center, said in the statement.
The company could file for Chapter 11 bankruptcy as soon as this weekend with a pre-packaged plan, people with knowledge of the plan said earlier. The potential filing follows weeks of negotiations between Guitar Center and its creditors, said the people, who asked not to be named because discussions are private.
Guitar Center, based Westlake Village, California, has around 300 stores across the U.S. It also owns brands including Music & Arts, which has more than 200 locations specializing in band and orchestral instruments for sale and rent. Stores and its call centers and other operations will stay open, it said, adding that merchandise credits, prepaid lessons, rentals and warranty will be honored.
A Chapter 11 filing would give the company a break on its debts and let it keep operating while management works on a turnaround. It would use the court process to implement the debt deal while continuing to pay employees and vendors as usual, the people said.
Bloombergreported last month that the chain was in talks with its creditors about restructuring its debts in a deal that could see certain holders take equity in the reorganized company. Guitar Center skipped October interest payments on its bonds due in 2022 and 2021 and is operating under a 30-day grace period that expires around the end of the week.
Covid-19 related shutdowns have hit nonessential retailers hard, and Guitar Center is vulnerable during economic downturns because purchases of musical instruments arehighly discretionary, according to a June 2019 report by Moody’s Investors Service. The pandemic has cost tens of millions of Americans their jobs, and many who are still employed have seen their pay cut substantially.
Department stores and specialty shops were already under pressure before the pandemic due to competition from online behemoths likeAmazon.com Inc. and falling foot traffic at shopping centers. Guitar Center has diversified by offering repairs and music lessons, which have continued online during shutdowns via videoconferencing services.
Ares gained control of the company in 2014 through an out-of-court restructuring. Guitar Center’s heavy debt load and financial pressures date back to a 2007 deal byBain Capital LP that took the firmprivate for $2.1 billion.
For the restructuring plan, UBS will be the lead placement agent for the $335 million fundraising through new notes, while Milbank LLP will serve as legal counsel and BRG as restructuring adviser. Houlihan Lokey is its financial adviser.
Stroock & Stroock & Lavan LLP is the legal counsel to a group of noteholders and Province is their financial adviser, and Kirkland & Ellis LLP is representing Ares on legal matters. Debevoise & Plimpton LLP is the legal counsel to Brigade Capital Management and GLC Advisors & Co. is its financial adviser. Paul, Weiss, Rifkind, Wharton & Garrison LLP represented Carlyle.
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