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Rating Action:

Moody's downgrades Guitar Center's PDR to Ca-PD; Caa1 CFR affirmed, new ratings assigned to proposed refinancing and exchange transaction

14 Mar 2018

New York, March 14, 2018 -- Moody's Investors Service today stated that if the exchange offer announced by Guitar Center, Inc. (GCI) on 12 March 2018 proceeds as outlined, it will constitute a distressed exchange, which is an event of default under Moody's definition of default. As a result, Moody's downgraded GCI's Probability of Default Rating to Ca-PD from Caa1-PD and affirmed its Corporate Family Rating at Caa1.

GCI proposal involves: (1) the exchange of its existing $325 million 9.625% senior unsecured due 2020 for new $325 million senior unsecured notes due 2022 with a 5% cash pay and 8% payment in kind feature; (2) the issuance of new $635 million senior secured notes due 2021; and (3) the amendment and extension of the company's $375 million asset-based loan maturity to 2022 from 2019. Pursuant to the proposal, proceeds from the new senior secured notes along with a $30 million draw on the company's amended and extend revolver will be used to refinance the company's existing senior secured notes which mature in April 2019.

Moody's affirmed the Caa1 rating on GCI's existing $615 mil 6.5% senior secured first lien notes due 2019 and the Caa3 rating on the company's existing $325 million 9.625% senior unsecured due 2020. Additionally, Moody's assigned a Caa1 rating to GCI's proposed $635 million senior secured notes due 2021, and a Caa3 to the company's proposed $325 million senior unsecured notes due 2022.

Moody's expects to upgrade GCI's PDR to Caa1-PD/LD upon the closing of the proposed exchange offer, as well as withdraw the ratings on the company's existing senior secured and unsecured notes. Moody's will remove the LD designation three business days after the closing of the proposed exchange.

"Although the exchange proposal would constitute a distressed exchange, if completed as planned, it will alleviate Moody's concern regarding GCI's significant and relatively near-term debt maturities and provide the company with some increased financial flexibility," stated Keith Foley, a Senior Vice President at Moody's.

"However, GCI's high pro forma leverage with debt/EBITDA on a Moody's adjusted basis at above 6.2 times -- total debt increases by $50 million as a result of the transaction -- remains a key credit concern, particularly given Moody's opinion that there continues to be a relatively limited revenue visibility regarding the retail environment for musical instruments," added Foley.

Downgrades:

..Issuer: Guitar Center Inc.

.... Probability of Default Rating, Downgraded to Ca-PD from Caa1-PD

Assignments:

..Issuer: Guitar Center Inc.

....Senior Secured Regular Bond/Debenture, Assigned Caa1(LGD4)

....Senior Unsecured Regular Bond/Debenture, Assigned Caa3(LGD5)

Outlook Actions:

..Issuer: Guitar Center Inc.

....Outlook, Remains Negative

Affirmations:

..Issuer: Guitar Center Inc.

.... Corporate Family Rating, Affirmed Caa1

....Senior Secured Regular Bond/Debenture, Affirmed Caa1(LGD4)

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa3(LGD5)

RATINGS RATIONALE

GCI's Caa1 Corporate Family Rating is based on Moody's view that, despite the near-term flexibility afforded by the exchange proposal and planned refinancing, GCI would remain very highly leveraged with pro forma debt/EBITDA on a Moody's adjusted basis at about 6.2 times, and a long-term debt balance (excluding amounts from the ABL facility) that will increase as the 8% PIK portion of the senior unsecured notes accrues to the company's debt balance. As a result, GCI's ability to reduce leverage to below 6.0 times by 2020, about one year prior to the proposed senior secured note maturity date, will be largely dependent on the company's ability to grow its EBITDA by at least 5% annually until then.

Positive consideration is given to GCI's leading market position and very strong brand awareness within the highly fragmented specialty retailing segment for musical instrument sales and rentals. Also considered is GCI's product diversification in musical instruments. Additionally, despite challenges, we believe GCI will generate some free cash flow during the next 12-18 months, and that the company's operations will be stable.

GCI's rating outlook remains negative. Although the proposed transactions will eliminate near-term debt maturities and provide the company with increased financial flexibility, the company's ability to reduce its debt/EBITDA remains dependent on the company's ability to grow its EBITDA. The negative outlook also considers that GCI's total debt increases by $50 million as a result of the proposed exchange and refinancing transaction.

Rating improvement requires that GCI materially improve its credit metrics -- achieve and maintain debt/EBITDA on a Moody's adjusted basis below 5.5 times -- as well as maintain an adequate liquidity profile. A higher rating would also require further demonstrated earnings stability. Ratings could be lowered if GCI is unable to complete the proposed exchange and refinancing transactions, if earnings or margins deteriorate, or appears the company will not be able to reduce debt/EBITDA below 6.0 times on a Moody's adjusted basis during the next 18 months for any reason.

GCI is the largest retailer of music products in the United States based on revenues. GCI is a wholly-owned subsidiary of Guitar Center Holdings, Inc. The company has three reportable business segments, comprised of Guitar Center, Musician's Friend and Music & Arts. GCI's parent company, Guitar Center Holdings, Inc., owns 100% of the outstanding common stock of Guitar Center, Inc. Guitar Center, Inc. Holdings has no material asset or operations other than its ownership of GCI. GCI is a private company and does not publicly disclose detailed financial information

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Keith Foley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Janice Hofferber, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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