A lot of the guitar channels I watch have been discussing the goings on at Guitar Center a company which has been struggling financially for quite a while. The news right now out of Guitar Center is that they are filing for chapter 11 bankruptcy protection, so in today’s video we will look at what is going on there, how they are restructuring, we will discuss what it means for suppliers, customers, employees and the commercial landlords renting store space to Guitar center.
Welcome back to patrick boyle on finance well my youtube channel is a finance channel a lot of the youtube videos that i watch are guitar channels i’ve unfortunately been a beginner on the guitar for the last 14 years and i’ll i’ll probably continue to be for life a lot of the guitar channels that i do watch have been discussing the goings on at guitar center a
Company which has been struggling financially for quite a while now the news at the moment at a guitar center is that they’re filing for chapter 11 bankruptcy protection so in today’s video we’re going to look at what is going on there and how they’re restructuring we’ll discuss what it means for suppliers customers employees and the commercial landlords renting
Store space to guitar center i’ll put some timestamps in the video description below so that you can skip ahead to the sections you are most interested in so guitar center has been around for quite a while it was founded in 1959 initially as the organ center where they originally sold organs electrical musical organs and shortly afterwards they transformed into
The vox center where they sold vox guitars and amps which were very popular with the british bands of the 1960s in 1971 they were renamed guitar center and they opened their second store in 1972. today they are the largest american music retailer with 269 locations they first went public in 1997 and have numerous subsidiaries including music and arts musician’s
Friend woodwind and brasswind and a few others in october 2007 right before the credit crunch bain capital a private equity firm bought guitar center out for 2.1 billion dollars bain took an equity stake of around 20 financing the rest of the deal with debt this is what’s known as a leveraged buyout and if you want to read more about how lbos work a big chunk
Of my corporate finance book which i’ve linked to in the video description below is devoted to that topic anyhow neither the credit crunch nor the period after it was very good to retail stores or to musical instrument sellers and in april 2014 ares capital one of the largest direct lenders in the united states converted their debt into equity ares transformed
From primary creditor or lender to primary owner with bain capital keeping a sliver of interest this takeover reduced guitar center’s obligations by about 500 million dollars and chopped more than 70 million dollars from its annual interest payments while this allowed guitar center to limp along it did not help that interest in guitar-based music has decreased
Since then and guitar sales have fallen globally by about a third since that 2014 deal so where does that bring us to today well in october guitar center missed the interest payments on its bonds due in 2021 and 2022 and was left operating under a 30-day grace period that expires around the end of the week on friday guitar center announced that they expected
To file for chapter 11 bankruptcy protection after reaching an agreement to restructure its debt this plan includes 165 million dollars in new equity being invested by aries along with the carlyle group and brigade capital management this restructuring process reduces guitar centers debt by almost 800 million dollars and brings in an incremental 375 million
Dollars in financing from certain existing note holders and lenders and also 335 million dollars in new senior secured notes so that’s 175 million in new equity and 710 million in new debt and 800 million of all debt being written off so first up let’s explain what chapter 11 bankruptcy is when a business can no longer service its debt or pay its creditors the
Business or its creditors can file with federal bankruptcy court for protection under either chapter 7 or chapter 11. in chapter 7 the business seizes operations a trustee sells all of its assets and then distributes the proceeds to its creditors any residual amount is then returned to the owners of the company this is a liquidation scenario which is not what’s
Happening with guitar center in most instances the original debtor remains in control of the business operations as a debtor in possession or dip and is subject to the oversight of the court this is the situation guitar center is in a chapter 11 bankruptcy results in one of three outcomes for the debtor reorganization conversion to chapter 7 or dismissal in
Order for guitar center to reorganize they must file and the court must accept a plan of reorganization the plan is basically a compromise between the major stakeholders in the case including the debtor and its creditors in a chapter 11 bankruptcy the company is usually recapitalized meaning more money is put in by either a new or existing investor who expects to
Generate a healthy return on this new investment the goal is that the company emerges from bankruptcy with more equity and less debt this deal is what’s known as a pre-packaged bankruptcy it’s referred to as pre-packaged because the restructure plan is agreed upon by the various stakeholders in advance of a chapter 11 filing so that’s what a pre-packaged chapter
11 bankruptcy is now how do they get rid of the 800 million dollars in debt well guitar center has been in distress for a while and as i mentioned they missed a bond interest payment last month they have a large amount of debt outstanding some of it coming due very soon they were unlikely to be able to pay off that debt on time so the debt itself will have fallen
In value significantly debt or bonds which are not distressed trade near 100 cents on the dollar meaning that the lender expects to recoup both the face value of the loan or principal invested plus the interest rate on the debt this would not have been the case for guitar center debt which would have been trading at some discount to 100 cents on the dollar let’s
Say guitar center’s debt was trading at 40 cents on the dollar well those lenders have to agree that that is probably all it’s worth and agree to only be paid back maybe a little bit over 40 cents on the dollar if they did not agree to this they might not get anything back reducing the debt load like this agreeing to a haircut on the loan principal value and
Possibly accepting some equity in exchange allows other investors to lend new money to guitar center and to invest in the equity too it’s worth noting that a lot of the youtube guitar channels pointed out that many guitar center stores had very few new guitars in them and were mostly selling used guitars that they’d taken in on trade over the last few months now
There’s been a lot of demand for guitars over the working from home period and lockdown but this might also be due to the reluctance of the big guitar manufacturers to extend trade credit to guitar center when they’re quite behind on their bills without this restructuring guitar center might have struggled to remain in business with no stock to sell it’s worth
Noting that fender the largest guitar maker is reporting that 2020 is their best year ever in terms of guitar sales so what is the deal with this new debt well over half of it is dip financing and asset-backed loans dip financing which stands for debtor in possession financing is a special form of financing provided for companies that are undergoing restructuring
Under corporate bankruptcy usually this debt is senior to all other debt and any other securities issued by a company that means that they would get paid back first if the business fail dip financing can be used to keep a business operating until it can be sold as a going concern if this is likely to provide a greater return to creditors than the firm’s closure
And a liquidation of assets it may also give a troubled company a new start under strict conditions asset-based lending is exactly what it sounds like it’s the business of lending money in an agreement that is secured or backed by collateral an asset-based loan or line of credit may be secured by inventory accounts receivable equipment or other property owned
By the borrower the final 335 million dollars is in senior secured notes the investment bank ubs will be selling these and this is debt that takes priority over other unsecured or otherwise more junior debt owed by guitar center so how might guitar center emerge from this well firstly they’ll have more capital to pay their suppliers with in addition they’ll have
Less debt which will likely be longer dated in addition under the u.s bankruptcy code commercial tenants that have filed for chapter 11 typically have the option to assume or reject any of their commercial leases if the business wants to remain in the business premises and keep the commercial lease as it is then they would assume the lease if they don’t want to
Do that they can reject the lease this means that guitar center may be able to get out of a number of their less attractive leases on underperforming stores philip mcknight a guitar youtuber puts forth that they may close between 50 and 100 of their 269 stores a link to his video in the description below while there are reports of high demand for guitars this
Year due to lockdowns and working from home guitar center own a number of other brands like music and arts and woodwind and brass wind these stores sell banned instruments and orchestral bands are no longer practicing in particular with wind instruments due to the pandemic guitar center have also focused on music lessons in recent years and that business has
Not done well under social distancing either so they may reduce store count and renegotiate other leases odds are they can push their landlords to significantly reduce their rent in the current retail environment guitar centers say that they’ll continue to run their stores to receive goods and to ship customer orders as usual all merchandise credit prepaid
Lessons rentals gift cards deposits orders and financing and warranties will be honored so as a customer you’ll probably be okay but equally i would not rush to buy someone a guitar center gift certificate for their christmas present it’s worth noting that just because they honor things like prepaid lessons doesn’t mean they’ll keep your local store open and so
You might not want to drive to another state in order to continue the lesson bundle that you’ve prepaid for so you should probably keep that in mind when thinking about pre-paying for a lot of lessons so a lot of musicians want to know will there be big guitar sales well philip mcknight has discussed this on his channel and he argues that there might be guitar
Center don’t have warehouses they use their stores to keep the goods that they sell in storage and in the event of store closures they may liquidate the goods online rather than shipping them to other stores in particular the used guitars and open box items might be liquidated so there may be some good deals in the pipeline there will be a lot more news on this
Coming out over the next few weeks and so i’ll occasionally post news updates in the comment section below this video hopefully you enjoyed this video if so do hit the like button and if you want to see more finance content like this hit the subscribe button talk to you later bye can i put the fender back now please not today my good man i’m feeling saucy i
Think i’m gonna buy it you
Transcribed from video
What You Need To Know About The Guitar Center Bankruptcy. By Patrick Boyle