Guitar Center negotiates plans to declare bankruptcy

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Mike Prosser | Wikimedia Commons

Gabriel Rivera

Guitar Center is the newest business to find itself on the precipice of bankruptcy amid the COVID-19 pandemic. The chain failed to make an interest payment of approximately $45 million dollars on Oct. 12 and is prepared to file for bankruptcy in the upcoming weeks, bond holders associated with the situation said.

Guitar Center’s origins date back to 1959 when Wayne Mitchell bought a local appliance store in Hollywood, California. The chain has since experienced several decades of success and currently has almost 300 locations nationwide along with over 200 Music & Arts stores.

Despite its long history, Guitar Center’s struggles have been exacerbated by the pandemic. The most prominent musical instrument retailer in the United States, Guitar Center is currently discussing a plan to restructure around $1.4 billion in debt with its creditors. The bankruptcy filing would permit the retailer to continue operating despite its liabilities and shut down specific locations that are struggling to generate sufficient revenue.

As a result, current stockholders within the business may gain control of the chain. Guitar Center will likely only choose to file for bankruptcy once it gains support from its creditors on the restructuring plan currently being negotiated.

The chain’s recent history with financial instability dates back to 2007 when it merged with Bain Capital. At the time, the affiliates of Bain capital who owned a majority of the retailer “valued the company at $2.1 billion including debt,” according to Bloomberg News.

This backlog of liabilities brought Guitar Center to the verge of a debt default in 2013, until Ares Management Corporation, an investment company, completed a debt for equity swap and took over as owners of the chain.

Despite having a capital structure deemed “untenable” by Moody’s, a credit ratings agency and occupying a precarious financial position for nearly a decade, Guitar Center did not witness any shortage in sales. Last year, the retailer “generated approximately $185,000,000 in earnings before interest, taxes, depreciation and amortization on $2.3 billion in revenue” according to a Music Trades report. This success, however, has been wiped out by losses caused by COVID-19 lockdowns. Like so many other giants in the retail industry, Guitar Center had a tumultuous summer characterized by closed doors and uncertainty. The chain was able to avoid defaulting in April after it “reached an agreement with bondholders to sell new notes and make good on debt payments it previously skipped,” according to Bloomberg. To make up for substantial losses, the retailer also furloughed over 9,000 employees across all locations.

Although the chain reopened several locations nationwide in July, it failed to generate the profit needed to make up for losses in revenue and pay off outstanding debts. While Guitar Center attempted to diversify its products with the introduction of virtual musical lessons, it continued to face competition, primarily in online sales.

Guitar Center’s struggles are characteristic of the current state of the retail industry as stores like Niemann Marcus, J.C. Penney and J.Crew all fell victim to tremendous financial losses caused by the pandemic. A few chains, such as Niemann Marcus, are still trying to recover from the languid summer and turn their fortunes around in 2021.

Guitar Center hopes to be one of the retailers able to weather the storm of financial losses caused by the pandemic and save its reputable name.