Dive Brief:

• Guitar Center exchanged about $56.4 million in bonds due in 2022, representing 90.7% of the aggregate principal on the bond group, the company said in a press release Monday.
• Guitar Center announced the exchange offer in May, following a missed interest payment.
• Following the initial disclosure of a debt exchange, Moody's and S&P Global both summarily downgraded Guitar Center to default levels, viewing the exchanged as distressed as it fell short of the bonds' initial terms. 

Dive Insight:

Guitar Center's exchange deal saved it from immediate default and preserved some liquidity by shorting on immediate cash payments to bondholders in return for higher principal payments later. As S&P analysts said in an emailed release in May, the terms of the new notes "are materially the same, but the nonpayment of cash interest provides lenders with less than the original promise, and we do not view the additional principal received as adequate offsetting compensation."

"We believe the additional principal received by the lenders does not offset uncertainty around the ultimate payment of the deferred amounts and the additional payment risk the lenders will be exposed to the additional debt," the analysts also said in the release, which was emailed to Retail Dive. 

Later in May, S&P raised its credit rating for Guitar Center from a default level to CCC- (both the default rating and upgrade are standard actions following a distressed exchange). S&P's low rating and negative outlook signal that the ratings agency thinks Guitar Center could restructure its debt again in the coming months as it approaches maturities, analysts said in a May 28 release. 

In a note from May 21, Moody's analysts also noted "the high likelihood of further restructuring transactions to address the company's high leverage and upcoming maturities."

Along with a debt load that has been a lingering albatross for the musical instrument retailer, Guitar Center faces a market upended by the coronavirus and economic downfall. The retailer closed its stores along with others as COVID-19 spread through the U.S., which meant not only the loss of product sales but shut the door on lessons as well.

"While the company's e-commerce sales and cost reduction measures will mitigate the initial impact of store closures, demand for musical instruments is highly discretionary and unlikely to recover rapidly when stores reopen," the Moody's analysts, led by Raya Sokolyanska, said in the note.

They added that they expect Guitar Center to have "weak" liquidity over the next year to 18 months, while the company also faces "governance risks" due to "aggressive financial strategies" associated with the retailer's owners, private equity firm Ares Management. 

In May, announcing that the company had reached a resolution over its missed interest payment, Guitar Center CFO Tim Martin said, "We believe that with these transactions and the staged reopening of the country along with our pre-pandemic positive business performance, we are well positioned to meet these challenging market conditions."

As the financial costs from store closures and continuing sales drags hit struggling and distressed retailers, their ability to stay out of bankruptcy court will likely depend on their ability to negotiate deals with debtholders and banks. Party City, Rite Aid and GameStop are among those making moves to give themselves more time or breathing room on their debt.