Guitar Center, the country’s largest musical instrument retailer, has filed for bankruptcy to reduce its $ 1.3 billion debt amid a liquidity crunch caused by the coronavirus pandemic.
The Chapter 11 filing is the “next step” in implementing a restructuring agreement with creditors that will reduce Guitar Center’s debt by approximately $ 800 million, the company said in a press release.
The lenders have also agreed to provide funding of $ 375 million to keep Guitar Center in business during the bankruptcy process. The company, which is owned by private equity firm Ares Management, faced roughly $ 1.0 billion in guaranteed debt due next year.
“This is an important and positive step in our process of significantly reducing our debt and strengthening our ability to reinvest in our business to support long-term growth,” said CEO Ron Japinga.
Guitar Center has more than 500 stores nationwide and generated more than $ 3.2 billion in revenue in fiscal 2019. According to The New York Times, its business was threatened before the pandemic by online competitors like Sweetwater and the company was heavily in debt following a private equity takeover in 2007.
But in a court statement, CFO Tim Martin said Guitar Center had 10 straight quarters of same-store sales growth before the pandemic.
The company “has proactively engaged with creditors to deleverage its capital structure and lengthen debt maturities in order to build a healthier balance sheet,” he said, but the closure of its stores due COVID closures “resulted in a significant drop in net sales and adjusted EBITDA in the first quarter.” “
“Liquidity constraints caused by [Guitar Center’s] the debt burden and upcoming maturities, as well as the economic upheaval created by the persistence of the COVID-19 pandemic, could not be addressed with short-term measures, ”Martin explained.
In addition to the $ 375 million in debtor financing in possession, the restructuring includes an equity infusion of up to $ 165 million from Ares, the Carlyle Group and hedge fund Brigade Capital Management, as well as a capital increase of $ 335 million in new debt.