Guitar Center, the largest US retailer of music instruments and equipment, filed for bankruptcy after the coronavirus pandemic kept customers at home and job losses made them less able to afford new gear.
The filing in the Eastern District of Virginia gives the company a break on its debts by letting it stay in business as it seeks to carry out a restructuring plan. A turnaround will be complicated by the fact that the company’s stores were shut in mid-March to help stop the spread of the Covid-19 outbreak. It has reopened locations while maintaining e-commerce operations.
A restructuring support agreement that Guitar Center announced on November 13 calls for new financing backed by existing creditors as well as $165 million in new equity investments from its private equity owner, Ares Management Corporation, and Carlyle Group and Brigade Capital Management.
Guitar Center, based Westlake Village, California, has around 300 stores across the US. Sister brands include Music & Arts, with more than 200 stores specialising in band and orchestral instruments for sale and rent.
The coronavirus shutdown has hit non-essential retailers hard, and Guitar Center was vulnerable because purchases of musical instruments are highly discretionary, according to a report by Moody’s Investors Service. The pandemic has cost tens of millions of Americans their jobs, and many who are still employed have seen their pay cut substantially.
The filings add to a list of retailers that have sought Chapter 11 court protection amid ongoing pressures from Covid-19 and changing consumer tastes. J Crew, Neiman Marcus and JC Penney filed for bankruptcy toward the beginning of the pandemic, unable to withstand the impact of temporary store closures and lost sales.
Guitar Center’s bankruptcy will reduce its debt load by roughly $800m and provide additional financing so the company can continue paying its vendors, suppliers and employees, the company said in a statement. It also negotiated a $375m debtor-in-possession loan provided by existing noteholders and lenders. Restructuring plans call for $335m in new senior secured notes arranged by UBS.
Guitar Center listed liabilities of $1 billion to $10bn, with a similar range for its assets, according to the filing. It expects to emerge from bankruptcy by the end of the year and employs about 13,000 people, filings show.
Before the pandemic, the company posted over 10 quarters of sales growth through to February, chief executive Ron Japinga wrote in a court declaration. Covid-19 “wiped out” much of that progress, he said.
Guitar Center faced a “significant debt burden and upcoming maturities” on top of the pressures from the pandemic, which could not be resolved through “short-term measures”, Mr Japinga said. It brought in A&G Realty Partners to optimise its real estate portfolio and other agreements to focus on investments.
Department stores and speciality shops were already under pressure before the pandemic due to competition from online behemoths like Amazon and falling foot traffic at shopping centres.
Guitar Center has diversified by offering in-store repairs and music lessons, which continued online through the shutdown via videoconferencing services.
Ares gained control of the company in 2014 through an out-of-court restructuring of Guitar Center’s borrowings. Its heavy debt load and financial pressures date back to a 2007 deal by Bain Capital to take it private for $2.1bn.
