USA Guitar Center - Debt/loan status - Downgraded from stable to negative

guitars4you

Just in from a trade press - See notes below

US MI retailer Guitar Center has received a thumbs down from ratings agency Moody's, being downgraded from 'stable' to 'negative' . According to Moody's the highly leveraged US chain, despite modest recent growth, is carrying too much debt.

'While Guitar Center has reported modest growth in comparable sales and EBITDA over the past three years, and is a solid operator with a leading position in the niche musical instruments space, leverage remains high and cash flow is limited even after two distressed exchanges,' said Raya Sokolyanska, Moody's vice president and lead analyst for Guitar Center.

Analysing Moody's decision, US specialist website Retail Dive says: 'Profits before interest and taxes are growing, if slowly, and Moody's noted projections of comparable sales growth in the low to mid-single digits, which is better than a lot of the retail world. But still, the firm noted that is not enough to reduce Guitar Center's debt load over the next 12 to 18 months. Moreover, the company is heavily dependent on its asset-based revolver "and will have limited remaining availability in the peak seasonal borrowing period," according to Moody's.

'That debt is a holdover from leveraged buyouts over more than a decade. The retailer was first acquired by private equity firm Bain Capital, and then Ares Management took control in 2014 in a deal aimed at reducing Guitar Center's debt.'

While generally supportive of Guitar Center's attempts to restructure its business, observers point to the poor history of private equity retail buyouts and the difficulty low margin/high cost operations have in servicing that debt. WSJ Bankruptcy, meanwhile, suggests that Guitar Center may face yet another debt restructuring. 

stickyfiddle

Aka “if guitars don’t become cool again soon they’ll go the way of Toy R Us because equity investors are all bastards.”

guitars4you

stickyfiddle said:

Aka “if guitars don’t become cool again soon they’ll go the way of Toy R Us because equity investors are all bastards.”

you mention Toys R Us - They were owned for a while by the same venture capitalist for a while - Bain Capital - 1.9 billion $ was the purchase price  - With connections in the past to Mitt Romney

idiotwindow

Another classic example of a basically profitable business teetering on the brink of failure due to being loaded with debt from a PE takeover. How these leveraged buyouts (where the purchaser effectively loads the debt incurred from the purchase onto the business purchased) are even legal is beyond my comprehension.

clarkefan

Leveraged buyout, is that the same thing the Glasers did with Man Utd? Borrow a load of money, use it to buy a company, then switch all that debt from you onto the company? 

soma1975

Chapper’s ffs! 

idiotwindow

Pretty much, yes. A leveraged buyout uses the assets of the target company as collateral to borrow the money to buy that target business. Once purchased, the original debt can be transferred via various means onto the balance sheet of the purchased business.

crunchman

clarkefan said:

Leveraged buyout, is that the same thing the Glasers did with Man Utd? Borrow a load of money, use it to buy a company, then switch all that debt from you onto the company? 

I doubt too many will complain if they continue to kill United.  The "fans" can all crawl back into the woodwork they crawled out of in 1993.

Philtre

soma1975 said:

Chapper’s ffs! 

If only there were other outlets for the Monkey Lord's Dungeons and Dragons Lutherial offerings, you know, like Riff City.

idiotwindow

crunchman said:

I doubt too many will complain if they continue to kill United.  The "fans" can all crawl back into the woodwork they crawled out of in 1993.

I don't have any time for companies that engage in this kind of practice but I doubt the leveraged buyout is "killing" Manchester Utd. The interest payments to the Glazers are nothing like as damaging to the Utd business as they are for companies that, whilst profitable, are less awash with cash. In the case of Utd, it is just reverting to the kind of football club it was before the Alex Ferguson era – one that buys a few flash players, sacks managers with regularity, and bounces around the top half of the top division. The club has money, it's just that the people at the top don't know how to spend it wisely.

guitars4you

clarkefan said:

Leveraged buyout, is that the same thing the Glasers did with Man Utd? Borrow a load of money, use it to buy a company, then switch all that debt from you onto the company? 

effectively yes - The Glasers don't personally need to actually have all the money to finance the MUFC take over - Say around 10% will be provided by their own personal funds - The banks loan the Glasers the other 90% as they have an appropriate track record - Then the Glasers transfer their 90% bank debt to MUFC - Then vote themselves a bonus to repay their initial 10% cash injection - So very quickly they own MUFC effectively via a zero purchase on their part and vote bonus periodically to justify their ownership 

guitars4you

clarkefan said:

Leveraged buyout, is that the same thing the Glasers did with Man Utd? Borrow a load of money, use it to buy a company, then switch all that debt from you onto the company? 

similar - In the case of Guitar Centre they were loaded with a 1.9 Billion $ debt from the take over

The level of debt itself is not an issue, providing you are in a buoyant market place and the business creates enough profit to finance both future growth, stability and existing borrowings - Otherwise such debt can be a tight grip around the neck and balls at the same time

idiotwindow

guitars4you said:

The level of debt itself is not an issue, providing you are in a buoyant market place and the business creates enough profit to finance both future growth, stability and existing borrowings - Otherwise such debt can be a tight grip around the neck and balls at the same time

Not sure what you mean (something a bit tautologous about your point). The debt is almost always an issue as it almost never has positive consequences – it being a drain on the company's cash flow for pretty much nowt in return.

clarkefan

guitars4you said:

clarkefan said:

Leveraged buyout, is that the same thing the Glasers did with Man Utd? Borrow a load of money, use it to buy a company, then switch all that debt from you onto the company? 

similar - In the case of Guitar Centre they were loaded with a 1.9 Billion $ debt from the take over

The level of debt itself is not an issue, providing you are in a buoyant market place and the business creates enough profit to finance both future growth, stability and existing borrowings - Otherwise such debt can be a tight grip around the neck and balls at the same time

Thank you.  So, Guitar Center's debt problems actually have nothing to do with the popularity of guitars then, they are because they got stuffed years ago by an investor on the make?

guitars4you

idiotwindow said:

guitars4you said:

The level of debt itself is not an issue, providing you are in a buoyant market place and the business creates enough profit to finance both future growth, stability and existing borrowings - Otherwise such debt can be a tight grip around the neck and balls at the same time

Not sure what you mean (something a bit tautologous about your point). The debt is almost always an issue as it almost never has positive consequences – it being a drain on the company's cash flow for pretty much nowt in return.

Many need to borrow to expand - If you can grow the business with 'organic' profits from within the business then fine - But say you have 1 shop and want 10 or 20, then chances are you need to borrow - In an ideal world you borrow say 10 million over 10/20 years and produce enough profits to pay the loan, additional expenses and still leave a healthy return for yourself 

In a positive environment the debt is not to be seen as anything negative, it should be seen as a 'silent partner' that allows you to expand, then just becomes a cost/overhead like wages, rent, rates etc 

Handled well an a 'loan' is an asset to grow - Handled badly and it is a curse

FelineGuitars

I must be mad and doing it all wrong as I try to run my business by trying to pay all my bills on time, if not right away, not having any debt hanging over me and no personal credit card debt etc.

I don't really have a lot of money but I don't owe others much either.

idiotwindow

guitars4you said:

idiotwindow said:

guitars4you said:

The level of debt itself is not an issue, providing you are in a buoyant market place and the business creates enough profit to finance both future growth, stability and existing borrowings - Otherwise such debt can be a tight grip around the neck and balls at the same time

Not sure what you mean (something a bit tautologous about your point). The debt is almost always an issue as it almost never has positive consequences – it being a drain on the company's cash flow for pretty much nowt in return.

Handled well an a 'loan' is an asset to grow - Handled badly and it is a curse

Yes, of course. Borrowing money is pretty much essential to grow a business. I think we are at cross purposes – I thought you were suggesting that a PE leveraged takeover (involving loading an existing business with a large debt - often equivalent to 90% of the company's assets - just to cover the purchase of the company) could be beneficial or benign where I think you are just saying that debt per se isn't necessarily a bad thing. If so, we are in agreement.

guitars4you

clarkefan said:

guitars4you said:

clarkefan said:

Leveraged buyout, is that the same thing the Glasers did with Man Utd? Borrow a load of money, use it to buy a company, then switch all that debt from you onto the company? 

similar - In the case of Guitar Centre they were loaded with a 1.9 Billion $ debt from the take over

The level of debt itself is not an issue, providing you are in a buoyant market place and the business creates enough profit to finance both future growth, stability and existing borrowings - Otherwise such debt can be a tight grip around the neck and balls at the same time

Thank you.  So, Guitar Center's debt problems actually have nothing to do with the popularity of guitars then, they are because they got stuffed years ago by an investor on the make?

Good question - Outside factors will come into play regarding the success of GC including Amazon, Sweetwater and other web based businesses/competition - Their own management structure, plus stock profile comes into play - I first went to their flagship store in LA around 2000 - Thought it was amazing - Went in for 4-5 years on the trot and each year it appeared  to be 'less special' than before

GC have a turnover around 2.3 billion $ a year - Sweetwater is the USA's 2nd largest business and turnover around 750 million $ - so a massive difference - But GC employ around 10500 for that turnover - Sweetwater around 1500 with a single 'mail order outlet'

In short their borrowings + supplier debt is an issue to their business - They can't really grow any further to service this level of debt - So a case of trying to arrange a debt restructure, but the report above will indicate the interest they will be charged will be higher, due to its financial situation - Same as a rich/poor country having a different level of 'debt status' with the IMF

guitars4you

idiotwindow said:

guitars4you said:

idiotwindow said:

guitars4you said:

The level of debt itself is not an issue, providing you are in a buoyant market place and the business creates enough profit to finance both future growth, stability and existing borrowings - Otherwise such debt can be a tight grip around the neck and balls at the same time

Not sure what you mean (something a bit tautologous about your point). The debt is almost always an issue as it almost never has positive consequences – it being a drain on the company's cash flow for pretty much nowt in return.

Handled well and a 'loan' is an asset to grow - Handled badly and it is a curse

Yes, of course. Borrowing money is pretty much essential to grow a business. I think we are at cross purposes – I thought you were suggesting that a PE leveraged takeover (involving loading an existing business with a large debt - often equivalent to 90% of the company's assets - just to cover the purchase of the company) could be beneficial or benign where I think you are just saying that debt per se isn't necessarily a bad thing. If so, we are in agreement.

Yes I can see were we crossed over - lack of space and time to go into deeper info - So yes in agreement

Yes I'm not applauding a PE leveraged takeover and loading the debt onto that business

But most/many businesses will borrow to grow

Moltisanti

the big difference between GC and MUFC is that Premier League football is virtually untouchable as a cash machine whereas the Guitar business is niche and doesn;t appear to be growing.
There seems to be a tipping point with stores too where having too many becomes counter productive - look at Sound Control, they went from one decent shop in Manchester to having them all over the country and they couldn't sustain it and went bump.
It's interesting that Lee Anderton only has one physical shop and hasn;t gone down the multiple stores route probably for this reason.

King85

FelineGuitars said:

I must be mad and doing it all wrong as I try to run my business by trying to pay all my bills on time, if not right away, not having any debt hanging over me and no personal credit card debt etc.

I don't really have a lot of money but I don't owe others much either.

That's the beauty of being your own boss, companies with share holders demand constant growth which realistically is impossible and eventually drive companies to fail due to their constant cost cutting to give the illusion of further profit rather than acknowledging there's a realistic cap on the max profit a company can make and being happy with the dividends that that pays.