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.
Comments
Been uploading old tracks I recorded ages ago and hopefully some new noodles here.
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.
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
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
Many guitars have a re-sale value. Some you'll never want to sell.
Stockist of: Earvana & Graphtech nuts, Faber Tonepros & Gotoh hardware, Fatcat bridges. Highwood Saddles.
Pickups from BKP, Oil City & Monty's pickups.
Expert guitar repairs and upgrades - fretwork our speciality! www.felineguitars.com. Facebook too!
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
Yes I'm not applauding a PE leveraged takeover and loading the debt onto that business
But most/many businesses will borrow to grow
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.