Moody’s Hits Gibson Brands with Another Credit Downgrade
Moody’s Investors Service, one of the largest credit rating services in the world, has downgraded the credit rating for Gibson Brands, the Nashville-based parent of Gibson Guitar, Onkyo, Teac, KRK, Philips, Stanton and more. Moody’s has set their rating on Gibson Brands debt to Caa3, down one step from Caa2.
The move caused Wall Street investment analyst The Street to raise the specter of the possibility of Gibson Brands defaulting on their debt.
See why Moody’s says the Gibson Brands situation is unsustainable…
Just this past March, we told you about Gibson announcing that it had successfully refinanced a portion of its debt. Unfortunately, this news apparently does not change Moody’s assessment that the company remains very troubled.
Moody’s said the reason for the downgrade is “Gibson’s weak operating performance, liquidity pressure from approaching maturities, and the view that the company’s capital structure is unsustainable.” Furthermore, their outlook for the near future on Gibson is said to be negative.
Many Negative Factors
Gibson is facing several issues impacting their rating. First, they have around $520 million in debt coming due in 2018…a big nut to crack. Secondly, their operating fundamentals are troubled. The company is carrying a tremendous amount of debt, much of it taken on to finance the purchase of several consumer electronics companies, like Onkyo and Teac, among others.
According to Moody’s, the company is carrying 10 times debt/EBITDA, a really high multiple. And even though the company is selling assets and refining assortments to raise funds and improve profitability, Moody’s only expects that ratio to drop to 8 times debt/EBITDA – still a high level of debt.
An ‘Unsustainable’ Situation
On top of that, Moody’s says the Gibson is cash flow negative, revenues are dropping as it drops models – mostly in its Audio brands – to refine the assortment, and the earnings improvements are unlikely to offset the impact of the revenue decline.
“We feel that Gibson’s capital structure is unsustainable due to the uncertainty over its ability to refinance debt that comes due in July 2018 and August 2018 given its very high leverage and weak operating performance,” said Kevin Cassidy, Senior Credit Officer at Moody’s Investors Service. “Despite our expectation of debt reduction over the next year with the expected proceeds from asset sales, we think debt/EBITDA will remain high at around 8 times.”
‘The Street’ Raises Possibility of Default
As Cassidy notes, Gibson will need to refinance that $520 million maturing debt and this will be likely very hard to do, given their weak operating results. This led The Street to declare in the headline to an article, “Gibson Guitar May Default If Company Can’t Refinance Its Debt.”
Moody’s called Gibson’s capital structure “untenable” and called the company subject to a “significant refinancing risk.”
Eliminating SKUs in Audio Brands
The announcement from the credit rating service said: “Moody’s expects a signficant decrease in revenue this year as the company reduces the number of SKUs in the Audio business and deals with the lingering effects of supply shortage issues that began in the first quarter of the fiscal year ended March 2018, new government regulations for certain wood products, and long-term secular pressure on guitar volumes in the Musical Instrument business.”
We first began reporting on Gibson back in 2012 when the company decided to try and diversify their business and lessen their reliance on the struggling musical instrument business by buying a series of consumer electronics companies. However, Gibson relied heavily on borrowing money to make these acquisitions and those investments have failed to meet the company’s expectations.
Caught in a Vise
As a result, the Gibson is caught in a vise between increased debt service costs and declining revenues. Their foray into consumer electronics has not helped the company escape the doldrums of their core musical instrument business and like MI, consumer electronics has a “highly discretionary nature.”
Gibson Brands has a $375 million note coming due on August 1, 2018, and another $145 million of secured bank loans coming due July 23, 2018. Says Moody’s: “The negative outlook reflects the uncertainty about the company’s ability to refinance its debt on acceptable terms and quickly execute an operational turnaround.”
See all of the brands that Gibson owns here…
To learn more about Gibson, visit: www.gibson.com.
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