S&P Global Ratings, part of top credit rating agency Standard and Poor’s, this week lowered their rating of Gibson Brands, Inc. to “CCC-” – down one step from the already low rating of “CCC.” Their outlook on Gibson? “Negative.” A rating of CCC- means that “default is imminent.”
See more on this latest torpedo to hit the good ship Gibson…
S&P put out their latest rating of Gibson Brands this week, with a new low CCC- rating, but perhaps more interestingly, they wrapped their announcement with an analysis that presented another fairly damning assessment of the struggling musical instrument and, more recently, consumer electronics maker.
In fact, for the first time that we’re aware of, S&P noted that Gibson is in default of key loan covenants, rendering it only able to move forward courtesy of a series of sequential waivers from their existing lenders. Those waivers could be pulled at any time – with a demand to accelerate the maturity of their debt and an immediate payoff.
A Very Significant Debt
And, as you have likely heard, Gibson’s debt is a significant one – totalling some $520 million and maturing in two stages in July and August. The company, with the help of investment banker Jeffries, is frantically scrambling to put together a $550 million refinancing package to meet their mid-year deadline and push the debt out – but most analysts are skeptical that new lenders will step in, largely because Gibson’s operating results continue to be dismal.
“The downgrade reflects the increased likelihood that Gibson Brands could experience a near-term liquidity shortfall and default on its debt if lenders choose to accelerate debt payments,” the announcement from S&P said. The analysis went on to point out that part of Gibson’s problem is a decline in music industry sales of products using rosewood due to new regulations restricting the import/export of this wood commonly used in guitars.
49% Profit Drop Triggers Violation of Covenants with Lenders
The analysis added: “Also, shorter pay terms disproportionally affected the consumer electronics business and led to lower volumes. Together these have contributed to a year-over-year decline in Gibson’s reported consolidated EBITDA of roughly 49%, as of Dec. 31, 2017, causing the company to fall short of their minimum EBITDA covenant on its domestic and international term loans.”
Gibson, the S&P analysis said, secured a waiver from their lenders at the end of December, but they are likely going to have to go back to lenders for waivers every month until they reach their debt maturity dates – or are otherwise refinanced. S&P says they may have to further lower their rating of Gibson if it “is unable to secure ongoing covenant waivers for its minimum EBITDA covenants and lenders choose to accelerate the maturing of its domestic and international term loans, or it is unable to successfully refinance its senior secured notes at par before July 23, 2018.”
Gibson, We Knew That Rate Cut was Coming
In the wake of the S&P announcement, Gibson, which is in the middle of a media blitz by CEO Henry Juszkiewicz who is attempting to push back on all of the negative media reports suggesting that Gibson is on the verge of bankruptcy, put out a statement responding to the agencies’ cut of its credit rating.
“Gibson Brands, Inc. today announced the company was aware that Standard and Poor’s might downgrade Gibson Brands a notch because the company has not locked down the refinancing of the bonds,” Gibson’s prepared statement said. “Gibson also realized that our asset-based lender has not changed the 12-month rolling earnings covenant to compensate for a bad April through June quarter and subsequent supply constraint issues in the quarter ended December 2017. Instead, they are choosing to give waivers every month.”
PR Effort Does Not Seem to be Working
The statement goes on to tout recent positive developments, such as the company successfully paying down $20 million of debt, and financial results that they say “showed an improvement in net profitability after taxes of just short of $10 million…”
However, we can’t help but notice that Gibson’s media blitz just does not seem to be working. There have been more media reports this week about their dire circumstances than at any time up to this point. Part of this was likely inevitable in the wake of the S&P announcement, yet some of it may be due to the fact that Gibson’s pronouncements often confirm elements of these negative reports. For example, in their acknowledgment of the S&P announcement, Gibson confirms that they are living on monthly waivers…a key element of why S&P cut their rating.
Default Could Be Coming
As a result, there is more coverage promulgated that seems to perpetuate the dark black cloud now hanging very low over Gibson’s head. Even the mainstream media, such as CNN, have reported on “Gibson Guitars’ debt problem.” CNN, like several other reports, repeats the bottom line assertion of the S&P analysis.
“With multiple maturities looming and operating weakness ongoing, we believe Nashville-based Gibson Brands could default on its debt obligations over the next six months.”
We’ll give the last word to Gibson: “We fully expect our ratings to improve once we announce our refinancing, which is in process.”
See more on Gibson at: www.gibson.com.