Analyst concern over Gibson outlook

Gibson Brands had its credit rating downgraded, thanks in part to the poor consumer reception of its 2015 guitar range.

The firm was downgraded by Moody’s Investors Service, which also put the rating on a negative outlook in a strikingly negative report. The rating was downgraded from B3 to Caa1.

In addition to the poor sales for its 2015 guitars, Gibson was downgraded because of high turnover in its senior financial management. The downgrade came with an ominous warning that Gibson may not be able to meet its near term financial obligations, including nearly $100 million in obligations due over the next 22 months.

“The ratings also reflect the company’s high leverage at around 8.5 times and the risks associated with the consumer electronics business,” said Moodys.

The downgrade comes on the heels of Gibson aggressively acquiring consumer electronics companies, including Onkyo, and shifting its strategy from focusing primarily on guitars and other instruments to more broadly becoming a music lifestyles company.

Those acquisitions have left the company increasingly leveraged, with a debt to earnings before interest, taxes, depreciation and amortization ratio of 8.5 times, according to Moody’s. That’s up from a debt to EBITDA ratio of 5-times at this time last year.

The company introduced some design changes last year including a robotic tuner called the E-Tune that was standard on many of its flagship models.

Gibson says it is already seeing a financial turnaround on the sales side, and the company has a new CFO to help address stability concerns about senior financial management. 

“The company has posted quarterly results for our quarter ending December 2015 that were materially better than they were for the prior year,” Gibson Chairman and CEO Henry Juszkiewicz said. “While we experienced a soft reception to our 2015 products, we have since introduced our improved 2016 product line that is performing extremely well both in sales to retailers and sell through to consumers globally. We feel we are on an upward trend, poised for an excellent year and are confident of the future.”