Business

Guitar Center Prepares for Possible Bankruptcy

Guitar Center has begun to prepare for a potential bankruptcy filing that could come as soon as next month, people with knowledge of the situation said. The retailer missed an interest payment of roughly $45 million earlier this month, setting off a 30-day grace period that could end in default, the people said.

The country’s largest retailer of musical instruments has reached out to creditors to discuss a plan that would involve the company filing for bankruptcy this year and emerging from it in early 2021, said the people, who requested anonymity because the talks are confidential. A spokesperson for Guitar Center did not respond to a request for comment.

It’s still possible that Guitar Center could avert bankruptcy, as it did earlier this year when it resolved a skipped interest payment in April with a distressed debt exchange. That led to a downgrade by the credit ratings agency Moody’s in May, which noted that the transaction did not “fundamentally change” the company’s “untenable” capital structure. It was the third cut in the company’s credit rating this year.

Guitar Center, whose roots go back to 1959, has nearly 300 stores nationwide. It is owned by private equity firm Ares Management, which acquired a majority stake in 2014 by converting some of the debt it owned in the retailer into equity. The retailer generated about $2.3 billion in sales its most recent fiscal year, according to Moody’s. It has about $1.3 billion in debt. Ares declined to comment.

For years, the company has struggled with the shift to online shopping and debt built up from a leveraged buyout by Bain Capital in 2007. There had been signs of a turnaround — it notched 10 consecutive quarters of sales growth through the end of February, one of the sources said — before the pandemic hit its business hard, as it has for much of the store-based retail industry.

If Guitar Center files for bankruptcy, it would follow the path of other retailers including J. Crew, Neiman Marcus and J.C. Penney, which were unable to withstand the impact of the downturn during the pandemic. Some, like Neiman Marcus, have already emerged from bankruptcy protection.

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