Gibson Guitar May Default

Rabs

Ohh oh....  Has Henry killed the guitar company?

https://www.thestreet.com/story/14280618/1/gibson-guitar-may-default-if-company-can-t-refinance-its-debt.html

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. 

Rox

By $1.2bn in 'revenue', I assume they mean turnover? 

RandallFlagg

Gibson will survive, the tide comes in the tide goes out, twas ever thus.

Bridgehouse

RandallFlagg said:

Gibson will survive, the tide comes in the tide goes out, twas ever thus.

Yeah, just like Pan Am

TTony

Didn't we do this a couple of weeks ago?

And a few months before that?

And last year?

And .....



Gibson up a financial creek with only the handle of a paddle (the tip fell off because of the poor tenon joint) really isn't news anymore, sadly.

Bridgehouse

TTony said:

Didn't we do this a couple of weeks ago?

And a few months before that?

And last year?

And .....



Gibson up a financial creek with only the handle of a paddle (the tip fell off because of the poor tenon joint) really isn't news anymore, sadly.

Yeah, but it's good to dredge it up every now and again tho, huh?

stickyfiddle

Gibson will keep doing this cycle until the banks say no. That might not be this round, but it will happen eventually. It will default on its debt, file for Chapter 11 proceedings, be restructured, and the guitar-making business bought by someone else. 

What will emerge will (hopefully) be a new, smaller Gibson, that puts quality above all else.

Sassafras

Don't worry, the Gibson Burstdriver will come to the rescue.

rossi

It will end up Chinese owned .That will make an interesting Chibson spectacle .American made is a slowly  unwinding  saga .Rarely a sign of quality anymore except to Trump supporters who demand an American job so that they can buy Chinese products.

TTony

rossi said:

It will end up Chinese owned .

That would be my bet.

Rabs

TTony said:

rossi said:

It will end up Chinese owned .

That would be my bet.

Ha, so Chibsons will finally be legitimate  :P

But yeah this story seems to come up a couple of times a year and they are still here... BUT as said, they can only keep this up so long...  Their business model is unsustainable (well for the guitar side anyway).

ICBM

The more newsworthy bit is that Fender are actually doing a bit better - not great, but probably well enough that the banks won't do anything to undermine their position in the immediate future.

IvisonGuitars

TTony said:

Didn't we do this a couple of weeks ago?

And a few months before that?

And last year?

And .....



Gibson up a financial creek with only the handle of a paddle (the tip fell off because of the poor tenon joint) really isn't news anymore, sadly.

Come on Rabs, you've got to let it go....you'll blow a gasket over all this Gibson stuff!! ;-)

Flink_Poyd

I just have a vison of Henry calling a meeting in the boardroom and just talking to himself in a mirror
" So Henry. What's your plan for turning the company around?"

"Well Henry, I think we should just put the price up by, ummm $1500?

"Great idea Henry, have another cookie....."

Rabs

miserneil said:

TTony said:

Didn't we do this a couple of weeks ago?

And a few months before that?

And last year?

And .....



Gibson up a financial creek with only the handle of a paddle (the tip fell off because of the poor tenon joint) really isn't news anymore, sadly.

Come on Rabs, you've got to let it go....you'll blow a gasket over all this Gibson stuff!! ;-)

Lol...

Well it is just kind of sad...  We can all see first hand how many models all the big companies pump out...  Like most business's these days they expect to make a growth on the financials every year and that's how they operate regardless of the market.. How many guitars can the industry sustain? (says the luthier )  and the stupid prices they expect people to pay...  They have themselves to blame (well partly).

TimmyO

Rox said:

By $1.2bn in 'revenue', I assume they mean turnover? 

Same same.

lustycourtier

Henry took over Gibson 31 years ago, and saved it from disaster. Think of everything that's changed since then...we have so much to thank Him for. 

darthed1981

As others have pointed out, even if Gibson does go bust someone will buy the guitar making business, the name and the IP, and start making guitars again.

Most likely, that someone will be Chinese and make most of the guitars in China, so "genuine" Gibsons will be Chinese made, and cheaper, and probably better.

Because there is literally no reason why China can't make guitars better than the USA, guitars just aren't that complex.

Nitefly

The supreme irony would be for Fender to buy Gibson, then bury them the way they have with Hamer, Guild, et al...

Why did Fender do that, to perfectly good guitar companies?

RaymondLin

Nitefly said:

The supreme irony would be for Fender to buy Gibson, then bury them the way they have with Hamer, Guild, et al...

Why did Fender do that, to perfectly good guitar companies?

I would find it more ironic if PRS buys them, being the biggest fanboy in the world.

CasperCaster

@Nitefly Fenders shopping spree buying Hamer, Guild etc was all about their proposed IPO. They needed to look like a large and diverse MI business in order to command an adequate price for their shares. Its also true that once floated, perhaps 90% of trades within a business sector are made on stocks on the first screen the trader (or algorithm) sees. So if you're further down the list the volume of trades in your shares is small and this usually correlates with a falling/low share value. Of course, Fender had to borrow to make those purchases, and gambled that the debts they accrued would be more than offset by the cash delivered by the IPO. And then the subprime market unravelled, the markets crashed and Fenders IPO never happened...