BUYOUTS-Bain Capital's Guitar Center hits rough patch

Wed Jun 12, 2013 6:41pm EDT

* Company faces 'deteriorating liquidity position'

* Named new CEO in March

* Music retailer was acquired in 2007 LBO

By Steve Bills

NEW YORK, June 12 (Reuters-BUYOUTS)-Standard & Poor's cut its debt rating on Bain Capital-owned Guitar Center Holdings Inc late last month, as the music retailer purchased during the height of the 2007 buyout boom struggles with "weak operating trends." The corporate credit rating on the Westlake Village, Calif.-based company dropped to 'CCC+' from 'B-'.

"Although we anticipate the company (will) obtain the amendment to its financial covenants, we believe its capital structure is unsustainable in the long term and the company is dependent upon favorable business, financial, and economic conditions to meet its financial commitments," S&P credit analyst Mariola Borysiak said in a recent note to clients.

Purchased using Bain Capital Fund IX in a deal valued at $2.1 billion six years ago, Guitar Center Holdings holds several debt instruments, including a $373 million ABL revolver, about $402 million in senior unsecured notes and $375 million in senior unsecured notes for its subsidiary Guitar Center Inc. It also floated a $650 million term loan.

S&P reviewed the company's debt instruments in the wake of weaker-than-expected performance over the past two quarters and a "deteriorating liquidity position." Guitar Center may have to borrow under its revolver to fund its operations and financing needs, S&P said.

Guitar Center's same-store sales fell 2.5 percent in its first fiscal quarter ending March 31, while revenue at its direct response unit dropped 8 percent to $73 million, according to the company's latest 10-Q filing with regulators. Total revenue rose 0.7 percent to $531.8 million. Adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, dipped to $45.8 million from $53.2 million, according to company filings and S&P. Its cash remained about flat at $44 million, while total current assets increased to $735 million from $710 million.

In March, Guitar Center named Mike Pratt as chief executive officer after he helped expand Best Buy Canada's growth to 275 stores from 165 as chief operating officer at the electronics retailer, according to a statement from the company. Pratt in a prepared statement at the time said he planned to build the Guitar Center business in both retail and online.

As of March 31, Guitar Center operated 244 Guitar Center stores in the United States, with 151 primary format stores, 80 secondary format stores and 13 tertiary format stores. It ranks as the leading retailer of music products in the United States based on revenue.

Guitar Center plans to open up 15 new stores in 2013 and its stores remain profitable, a person close to Bain Capital said. The company recently took advantage of favorable credit markets to change the terms on its senior secured term loan, with 99 percent of lenders consenting to a new loan amendment, according to the person.

Looking ahead, S&P said management's efforts over the next year will revolve around strengthening the company's brand image and improving declining operations at the company's direct response segment.

"However, we anticipate only modest profit gains during 2013 given our view of the increasingly competitive landscape and persistently challenging macroeconomic conditions in the U.S.," S&P said.

In its liquidity and capital resources section of its March 31 quarterly report, Guitar Center said it believes its asset-based revolving credit facility and funds generated from operations will be adequate to fund debt service requirements, capital expenditures and working capital requirements for the next 12 months. Executives at Bain Capital and Guitar Center declined comment.