America’s largest retailer of musical instruments and gear filed for Chapter 11 bankruptcy over the weekend, in a plan to drastically reduce its current debt of approximately $1.3 billion by $800 million, Reuters reported.
That doesn’t mean the company is shutting down — a common misconception when people hear the word “bankruptcy.” The voluntary filing was “part of a process that will strengthen our company and allow us to serve our customers even better for the long term,” Guitar Center President and CEO Ron Japinga tells Rolling Stone. “We expect this to be a quick process and plan to emerge before the end of 2020.”
Japinga says all stores, e-commerce, lessons, and call centers remain open and available as the company continues to operate with “business as usual.” And he says Guitar Center looks forward to “many, many more years of doing so.”
Jonathan Pasternak — a veteran corporate finance attorney and current partner in Davidoff Hutcher & Citron’s bankruptcy, restructuring, and creditor rights group — explains that the news, which he’s been expecting for months, isn’t strictly Covid-related. It comes on the heels of private acquisitions that have occurred over the last 15 years.
“It’s two-fold,” Pasternak, who’s also a guitarist and Guitar Center patron himself, tells Rolling Stone. “The company has been burdened in carrying too much debt on its books, but then Covid knocked out the profitability, which led them to a cash crunch and an inability to make their debt service payments.”
He says Guitar Center has actually done considerably well despite the downturn in retail in the last couple years, thanks in large part to a strong e-commerce infrastructure; it just wasn’t doing well enough to squash their huge debt. “They were actually showing profitability consistently over about 10 quarters prior to Covid,” Pasternak points out. “Right up to Covid, they had been consistently profitable, doing somewhere around $2.3 billion in 2019 with 13,000 employees. Then boom, Covid hits, 75 percent of the stores shut initially, and 60-65 percent of the employees get furloughed.”
Things have eased up recently, with stores opening back up and only five to 10 percent of Guitar Center’s employees still furloughed. Quarantine has inspired many novices to pick up musical instruments, as well. But the months of loss-making are a serious gut punch when a company’s been dealing with debts over a decade old.
In 2007, private investment firm Bain Capital bought Guitar Center via leveraged buyout (aka LBO), meaning that it acquired equity interest by putting debt on it as a form of payment.
“This is a classic reason for bankruptcy in general,” Pasternak says. “Bain loaded up the company with debt, and that continued with Ares Management acquired them in 2014.” Now, Ares has the company — along Brigade Capital Management and Carlyle — but no private-equity firm wants too much debt on its hands.
Pasternak points out that Guitar Center could take advantage of the bankruptcy by getting “lean and mean” and shedding some losses, such as unprofitable stores. “The most important part is that Ares is going to shed a lot of their debt off the books, and usually they do that by converting it into equity in the reorganized entity,” he says. “Guitar Center is going to come out of this thing fine. They’re on a fast track to reorganization. They could be out by December 31st. I don’t expect any hitches.”
This is what the bankruptcy world calls “balance-sheet correction,” he adds.
When Rolling Stone asked Guitar Center if the company had any plans to close some of their brick-and-mortar shops, Japinga did not confirm or deny, saying only: “We are pleased with our current footprint and we always look to optimize our retail locations to best support our customers.”
So is this bankruptcy a sign of a slow death for the physical music store? Unlikely. Consumers will probably not shy away from the well-known company just because it went through a restructure — and instruments are still a physical product. “This is a touch-and-feel industry,” Pasternak says. “There will be an ongoing need for that even if certain things can be done over the Internet.”