Guitar Center Suffers Major Ratings Downgrade From Moody’s: ‘Leverage Remains High & Cash Flow Is Limited’

Guitar Center Suffers Major Ratings Downgrade From Moody’s: ‘Leverage Remains High & Cash Flow Is Limited’

Moody’s has downgraded the credit rating of Guitar Center, and the Westlake Village-based music retailer is continuing to struggle financially amid the coronavirus (COVID-19) crisis.

First, Moody’s reduced Guitar Center’s corporate family rating (CFR) — or its “ability to honor all of its financial obligations”— to Caa2 from Caa1. The Caa2 rating is part of the lower portion of Moody’s non-investment grade chart.

Next, the financial services company dropped Guitar Center’s probability of default rating (PBR), or Moody’s view of the chances that Guitar Center will default on its debt, from Caa1-PD to Caa2-PD. And lastly, Guitar Center’s “senior secured notes rating” — or its credit rating on loans backed by its assets — fell from Caa1 (LGD4) to Caa2 (LGD3).

Overall, Moody’s changed its outlook of Guitar Center’s financial status and fiscal prospects from stable to negative.

Addressing the rating drop, Moody’s vice president and lead Guitar Center analyst Raya Sokolyanska said: “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.”

At the end of March, Guitar Center CEO Ron Japinga furloughed approximately 9,000 of his company’s 11,000 employees (while committing to covering their benefits and extending their pay through April), in addition to foregoing his 2020 salary. Other executives accepted pay cuts, as Guitar Center’s sales volume and income have decreased dramatically amid coronavirus-prompted nonessential business closures and stay-at-home orders.

Guitar Center has long struggled beneath the weight of substantial debt, which is hovering around $1 billion presently. The per-share price of the brand’s parent company, Ares Management (ARES), has fared better than that of many other business entities, though; at the time of this writing, its value was roughly $34.

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