Moody’s Revises GC’s Outlook to Negative, S&P Global Downgrades Ratings

On April 12, Moody’s Investors Service revised the outlook on its B2 rating on Guitar Center (GC) to negative, suggesting it could downgrade that rating further into junk territory in the medium term. Update: Then, on Wednesday, May 3, S&P Global downgraded GC’s rating to CCC-plus from B-minus saying the company had underperformed expectations.

“The outlook revision considers Moody’s view that GCI, similar to other retailers, will continue to be challenged with respect to improving its consolidated revenue and earnings performance,” said Keith Foley, a senior vice president at Moody’s.

Bonds issued by Guitar Center currently sit at record lows due to growing concerns related to the organization’s $1 billion (give or take) of outstanding bond debt, part of a total debt burden that amounts to roughly $1.6 billion.

GC’s lease-adjusted debt-to-EBITDA coverage for 2016 was about 6.3 times, which is precariously near 7.0 times that Moody’s believes would trigger a downgrade.

Additionally, the company has $615 million of 6.5% notes that mature in April of 2019, which Moody’s rates at B2. According to MarketAxess, those notes traded last at 83.25 cents on the dollar.

An additional $325 million of 9.625% notes mature in April of 2020, which carry a lower rating from Moody’s of Caa1, or seven notches into junk territory. Those notes last traded at 58.10 cents on the dollar, again according to MarketAxess.

“From strictly a quantitative perspective, ratings could be lowered if lease-adjusted debt/EBITDA increases to at/near 7.0 times or EBIT/interest drops below 1.0 time,” said Foley.