Yet Again, Guitar Center, Owner of AVDG, Sees Moody’s Downgrade Its Credit Rating

Moody’s on GC: ‘Outlook Remains Negative’

This week, Moody’s Ratings, part of Moody’s Investors Services, announced that it was cutting Guitar Center’s credit rating to Caa3, down from Caa2. Guitar Center came on Strata-gee’s radar screen back in 2017 when it acquired AudioVisual Design Group (AVDG), a multi-regional integration group that to me seemed an odd fit with the mission of a struggling mass market musical instrument dealer. In 2020, Guitar Center filed for bankruptcy but has since exited on court approval of a new operating plan.

See more on the struggles of Guitar Center causing this downgrade

A little over a year ago in early 2023, I told you about Moody’s Investor’s Services cutting its credit rating on Guitar Center. This was a serious sign that the company was struggling again – in November 2020, Guitar Center had fallen into bankruptcy.

Guitar Center’s bankruptcy filing in November was what is known as a pre-packaged bankruptcy – which means that the company had already pre-negotiated a deal with creditors such that it could quickly emerge from bankruptcy. And, almost magically, that is exactly what happened as the judge approved its reorganization plan and the company emerged from bankruptcy in December 2020.

At First, Things Seemed Fine

At first, things seemed to improve thanks to a financial restructuring that discharged $800 million of debt, allowed a private equity cash infusion of $165 million, and authorized a $365 million debtor-in-possession financing package. In fact, things were going so well that in October 2021 Moody’s actually upgraded Guitar Center’s credit rating to B2 from its previous post-new financing package rating of B3. While a B rating is still below investment grade, it was way better than their rating entering bankruptcy.

But that good mojo only lasted a little longer than 18 months, when Moody’s had to reverse course and begin a new round of downgrading Guitar Center’s credit, taking it back down a notch to B3. Moody’s rating scale is three upper case letters A, B, C…further stratified with a lower case “a”. So, for example, the “B” scale goes Baa…Ba…B for higher/middle/lower “B” level classifications, in this case. Moody’s then adds one more technique for further stratification with a rating of 1, 2, 3. These represent high, middle, and low within a class – i.e. B1…B2…B3. So GC slipping from a B2 to a B3 is a downgrade within the B classification.

New Downgrades Signal Business Downturn

It was a sign of a new decline in Guitar Center’s business since emerging from bankruptcy. And now, it is declining again. Moody’s says it is moving Guitar Center from Caa1 rating (the next step down from B3) to Caa2.

So let me first say that I was unaware of Guitar Center being apparently previously downgraded from B3 to Caa1. That must have happened sometime within the last year. In any event, it has been taken down another level to Caa2. This is not a good rating. Here is what a Caa2 rating means from Moody’s scale…

What a Caa2 Rating from Moody’s Means

“Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk,” according to Moody’s scale. Furthermore, moving from a Caa1 rating to a Caa2 rating shows further decline in Moody’s assessment of Guitar Center’s business performance.

Moody’s also offers an “outlook” which is an effort to project how the business is doing moving forward. According to Moody’s about Guitar Center’s outlook: “The outlook remains negative.” A “negative” determination means that based on the company’s current operations things are not getting better…not staying the same…they are getting worse.

‘Continued Weak Operating Performance and Credit Metrics’

The downgrade reflects Guitar Center’s continued weak operating performance and credit metrics. The new management team’s strategic plan to drive revenue and earnings improvement by expanding its Guitar Center store inventory assortments for enthusiast musicians and professionals while paring back on beginner musician inventory is taking longer than expected.

Moody’s Ratings; From Moody’s Ratings Downgrades Guitar Center’s CFR to Caa2; outlook remains negative

The credit agency went on to note that various business performance and credit metrics are weak. For example, debt-to-earnings is 12x, meaning that Guitar Center’s debt level is 12 times higher than earnings. Moody’s also noted that the company is generating negative free cash flow, which means its burning more cash than it’s generating. That’s not good…

The Debt Bill is Coming Due

But what’s really concerning to Moody’s on an urgent basis is that Guitar Center has a $375 million ABL (asset-based loan) coming due soon – in December 2024. On top of that, its “entire debt capital structure, inclusive of its $550 million of senior secured notes, comes due in January 2026…” This leaves GC limited time to get its act together to make these heavy, heavy upcoming payoffs.

“As such, we believe there is heightened probability of a debt restructuring,” Moody’s noted. The credit agency also notes that there are “governance considerations, including its ownership by private equity sponsors and former creditors.”

As Goes Guitar Center, So Goes AVDG

In all of Moody’s detailed assessment, there was no mention of the AVDG division – either positively or negatively. However, as one of the company’s relatively smaller business units, its fortunes likely rest with whatever happens to the overall parent company.

Learn more about Guitar Centers by visiting guitarcenter.com.

See what AVDG has to offer at avdg.com.