Guitar Center downgraded to ’CC’ by S&P on debt exchange plan

Investing.com -- S&P Global Ratings downgraded Guitar Center Inc. to ’CC’ from ’ CCC (WA:CCCP)’ with a negative outlook following the company’s proposed debt exchange plan.

The rating agency announced the downgrade on Thursday, viewing the proposed transaction as a distressed exchange equivalent to a default.

On July 17, Guitar Center entered into a transaction support agreement with holders of approximately 72.5% of its 8.5% senior secured notes due in 2026. Under the agreement, noteholders can exchange their holdings for new first-lien senior secured PIK notes due 2029.

Additionally, eligible holders of the company’s series A preferred stock and Holdco Notes who also own the 8.5% senior secured notes can exchange their preferred stock and Holdco Notes for a combination of new second- and third-lien senior secured PIK notes due 2032.

S&P believes the transaction offers lenders less favorable terms than originally promised, with interest terms being amended downward and payment terms extended without adequate compensation. The agency also noted the risk of a conventional default if the transaction fails to close, given that the existing senior secured notes mature in January 2026.

The transaction aims to improve Guitar Center’s liquidity and provide time for implementing strategic initiatives. The company reported a free operating cash flow deficit of about $93 million in 2024, partly due to reduced profitability from inventory discounting.

Guitar Center’s strategic focus is on recapturing serious and professional musician customers. The company achieved modest sales growth in 2024 through inventory rebalancing and product assortment refinement. S&P expects low-single-digit revenue growth in 2025 as the company continues to improve its merchandising and in-store experience.

The company’s $375 million asset-based lending facility, with approximately $195 million drawn at the end of the first quarter, serves as its primary liquidity source.

S&P indicated it will lower Guitar Center’s issuer credit rating to ’SD’ and issue-level ratings to ’D’ upon completion of the transaction. However, the rating could rise to the ’CCC’ category if the proposed transaction is not completed.

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