* 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
"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.,"
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