I’ve been so busy with treason and espionage of late that I’m weeks late covering the updates on Guitar Center bonds.
As all my readers know, for a simple group of guitar stores, GC is a whole bunch of drama. And while it may not technically have been “the end” when the company started shedding workforce and product diversity to survive a near-miss with bankruptcy, it’s not looking good. Two years and all the same debt later, Moody’s downgraded Guitar Center bonds on fears that the company could not generate enough free cash to even chip away at that $940 million in debt financed at subprime rates. As you can see in the chart, unsecured bonds due 2020 now yield 35% interest on secondary markets – well into ultra-risky territory that assumes the possibility of bankruptcy.
According to Marketwatch, the musical instrument retail leader can neither refinance the financial structure put together by junk bond kings Ares Capital, nor can its operations handle the debt load – just like before the restructuring.
I was most struck by this clip in that Guitar Center’s main investor, Ares Capital, is planning a very unusual arrangement for its other major retail holding, Neiman Marcus.
Also in April, retailer Neiman Marcus said it was making coming interest payments on its high-yield bonds by issuing more debt, instead of burning through cash. Neiman Marcus was taken private in a $6 billion buyout by Ares Management and the Canada Pension Plan Investment Board in 2013 that left the company saddled with $4.9 billion of long-term debt.
Analysis for you bassists and drummers: This is taking out another credit card to get a cash advance to pay your other credit cards.
So, that’s the much-touted retail managerial genius of Ares Capital, who were supposed to save Guitar Center. Like most private equity companies, their answer to your debt problem is more debt. And some press releases.