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Guitar Center CFO Discusses the Debt

GC sits down with Music Inc.'s Frank Alkyer to discuss the chain's financial situation

Tim Martin, CFO of Guitar Center, aimed to set the record straight. During the company’s Media Day back in October, Martin sat down with members of the trade press to discuss the company’s financial picture, especially long-term debt that will come due between 2016-2018.

Bain Capital purchased Guitar Center Holdings in 2007 for $2.1 billion, borrowing $1.56 billion in making the purchase. The company currently holds several forms of long-term debt, including $434.9 million in senior unsecured notes for Guitar Center Holdings, $394.9 million in unsecured notes for the Guitar Center subsidiary, $165 million in asset-based revolving debt and a $617.5 million term loan. In June, when Standard & Poor’s cut the company’s credit rating (Moody’s rated Guitar Center as stable during that same time period), a variety of industry watchers began to question the long-term outlook for the industry’s largest retail chain.

But Martin said the company is sound and moving forward. Here, in an edited transcript, are his remarks.

Music Inc.: Down the road, you have some serious debt coming due.

Martin: Not for a while. Actually, we’ve got plenty of years left.

Music Inc.: 2016, 17, 18 …

Martin: ’16, ’17 and ’18. At the end of the day, nobody ever does a leveraged buyout expecting that you’re going to pay that off with operating cash flow.

Our bonds are trading above par. That means it’s an attractive investment. Therefore, I would imagine if we wanted to refinance it, we could get some takers.

It’s kind of important to know, from a finance perspective, how the debt market looks at it. We’ve got 255 Guitar Center stores and 118 Music & Arts stores. All of them are cash-flow positive. Every single store we have in the chain is actually making cash-flow money, which from a retail investor perspective, is a huge positive — from a CFO’s perspective, a huge positive.

You kind of have to break the business into two pieces. You have the operations and the capital structure.

If you look at the operations, the business as an operating entity generated over $200 million last year of EBITA.

You can take a look at the financing aspect of it, but at the end of the day, that’s the owners of the company’s problem. It’s not the operation’s problem. It’s not the vendors’ problem. It’s actually not even the employees’ problem.

Because if there were ever a financial distress event, and I don’t think that’s likely to happen, and we could talk about a million reasons why, the vendors are in the best position possible because the bankruptcy court — and, by the way, banks — want to keep running the business so they can make more money.

If we have more than 370 stores that are generating cash flow, there is no way in a million years that a bank or bankruptcy court is going to shut the business down.

The capital structure and how we deal with the debt scenario may be a different answer. Maybe it will be refinancing. It could be an equity infusion. It could be an IPO. There are a million different answers. We’ve got years to deal with that, and some very patient owners.

Music Inc.: From the capital side of this, there’s a very different planning process than the store side of the business.

Martin: Absolutely. If anybody in our investment portfolio world — banks, Bain, the people who hold the biggest chunk of the debt — ever were concerned that they wouldn’t get their money back, we wouldn’t be opening new stores. We wouldn’t be spending over $60 million a year in capital expenditures. So, they see our financials, they sit in on our board meetings, they talk to us about the investment theory.

If they were worried, they wouldn’t let us do that, and they wouldn’t support it like they do.

Our single largest debt holder wants us to grow the business. It’s excited about the new store concept. Bain is excited about the new store concept and rolling out stores.

Music Inc.: But when someone downgrades your debt, people react.
Martin: But read Moody’s note: No short-term liquidity concerns. There is concern over what happens in 2017 and 2018. At the end of the day, the debt holders don’t have ongoing cash flow necessary to pay off the debt. No LBO does. That doesn’t happen. The capital structure is Bain’s problem — but I addressed that earlier with various scenarios, and we have to deal with it. It’s my concern and the owner’s of the company, but the business is not going away. MI