What's lower than a B? The financial rating of Gibson Brands Inc.
The famed guitar maker had its rating lowered to Caa3, nine notches into junk territory, with a negative outlook, as maturity of $520 million in debt approaches.
The privately-held company will need to refinance the debt before July 2018 or it faces a likely default. Moody's Investors Service Inc. said last week that there's "uncertainty" about the company's ability to refinance this debt and that its capital structure is "unsustainable." Gibson didn't respond to request for comment.
Although Gibson's finances are the most stressed, according the rating firm, it's not the only music company that's playing the blues.
In December, Moody's moved piano maker Steinway Music Group to Caa1, from B2, because of the company's highly-leveraged balance sheet. The company, owned by Paulson & Co., has a $300 million senior secured term loan due in 2019 and is leveraged at 8 times debt to Ebitda (earnings before interest, tax, depreciation and amortization), according to Moody's.
Last year, Fender Musical Instruments Corp., partly owned by Servco Pacific Capital and TPG Capital LP, was able to pull itself up to B1 from B2, which is still in speculative territory but only by four notches. The upgrade followed Fender's move to pay down $40 million of debt in 2016, bringing its leverage to 2.5 times debt to Ebitda. Still, the company has posted small revenue and has poor product diversity, Moody's said.
Music retailer Guitar Center Inc. had its outlook changed to negative in April (rating maintained at B2) as a result of the challenging retail environment and substantial debt maturities approaching in the next two years. Guitar Center is owned by Bain Capital LP.
None of these companies responded to request for comment Tuesday.
The industry generally is vulnerable to any dips in consumer spending, due to the often-discretionary nature of musical instrument purchases.
But for Gibson specifically, Moody's also cited a reduction in the number of products it's selling, new regulations and turnover among senior management as causes for concern.
"We expect Ebitda to remain essentially flat this year as we think margin enhancements will not be enough to offset revenue declines," Moody's said in the Aug. 17 downgrade. "Moody's expects a significant decrease in revenue this year as the company reduces the number of SKUs in the Audio business and deals with the lingering effects of supply shortage issues that began in the first quarter of the fiscal year ended March 2018, new government regulations for certain wood products, and long-term secular pressure on guitar volumes in the Musical Instrument business."
Turnover at the "senior financial management level creates challenges to executing a quick operational turnaround," the rating firm added.
Levered at a rate of 10 times debt to Ebitda, Gibson has $375 million in senior bond debt maturing on Aug. 1, 2018. An additional $145 million in senior bank debt has a springing maturity of June 23, 2018, if the company doesn't manage to refinance the bonds.
The Nashville-based company, famous for its Les Paul guitar, has $1.2 billion in revenue annually, according to Moody's, and manufactures brands Gibson, Philips, Epiphone, Kramer, Baldwin, Onkyo, KRK and Stanton.
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Editors' pick: Originally published Aug. 22.