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Rating Action:

Moody's downgrades Guitar Center to Caa2

Global Credit Research - 12 Nov 2010

New York, November 12, 2010 -- Moody's Investors Service today downgraded Guitar Center Holdings, Inc.'s Corporate Family Rating (CFR) and Probability of Default Rating (PDR) to Caa2 from Caa1. The company's SGL-3 Speculative Grade Liquidity rating was affirmed. The rating outlook is stable.

RATINGS RATIONALE

The downgrade is a result of Guitar Center's starting to pay cash interest on its senior unsecured PIK notes starting in April 2011. This will significantly increase the company's cash interest burden. While Guitar Center's sales have begun to show signs of improvement, Moody's does not expect the company's earnings to improve sufficiently during 2011 such that it can fully cover its interest expense through internally generated cash flow. The company will likely need to draw upon its excess cash cushion to make its interest payments. Thus, Moody's believes that the company's capital structure is unsustainable over the medium term at current levels of operating performance, and hence the probability of a default has increased.

The Caa2 Corporate Family Rating and Probability of Default Rating reflect Guitar Center's highly leveraged capital structure and heavy interest burden. Moody's views Guitar Center's capital structure as unsustainable over the medium term at current levels of operating performance given the sizable level of operating income growth needed to bring leverage and coverage to more reasonable levels. It is unlikely that Guitar Center will be able to sufficiently deleverage from simply growing comparable store sales at existing stores and boosting profits. As such, Moody's believes that Guitar Center could voluntarily pursue a debt restructuring or an amendment to its debt facilities on terms that Moody's would deem to be a distressed exchange, and hence a default. However, Moody's also notes that Guitar Center's liquidity is adequate and that there are no sizable debt payments until April 2013 when the company is required to redeem a portion of its PIK notes. In addition, Guitar Center does not have any debt maturities until October 2013 when its revolving credit facility expires.

The stable outlook acknowledges that the Caa2 PDR adequately reflects the moderately high probability of default over the medium term. The stable outlook also reflects Moody's opinion that Guitar Center's operating performance will only modestly improve and that it will maintain adequate liquidity.

Ratings downgraded and LGD point estimates changed:

For Guitar Center Holdings, Inc.:

Corporate Family Rating to Caa2 from Caa1

Probability of Default Rating to Caa2 from Caa1

For Guitar Center, Inc.:

$650 million (now $628 million) senior secured term loan to Caa1 (LGD 3, 34%) from B3 (LGD 3 35%)

Ratings affirmed:

For Guitar Center Holdings, Inc.

Speculative Grade Liquidity Rating at SGL-3

A higher rating would require either an absolute reduction in debt levels or a material improvement in operating performance that creates a capital structure that is more sustainable over the longer term. Quantitatively, an upgrade would require that Guitar Center maintain EBITDA less capital expenditures to interest expense of at least 1.0 time. An upgrade would also require the company to continue to maintain adequate liquidity.

Ratings could be downgraded should Guitar Center experience a decline in earnings or liquidity or should the probability of default increase for any reason.

The last rating action for Guitar Center was on September 15, 2008 when its Corporate Family Rating and Probability of Default rating were downgraded to Caa1 from B3.

The principal methodologies used in this rating were Global Retail Industry published in December 2006, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Guitar Center Holdings, Inc. is a holding company whose sole asset is Guitar Center, Inc. Guitar Center, Inc., headquartered in Westlake Village, California, is the largest musical retailer in the Unites States. It operates three distinct retail businesses -- Guitar Center, Music & Arts, and Musician's Friend (its direct response subsidiary). Total revenue is about $2 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Margaret Taylor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's downgrades Guitar Center to Caa2
No Related Data.

 

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