Guitar Center has a new owner and an improved balance sheet after a complex recapitalization transaction was completed in late March. Ares Management, an investment firm with $70 billion in assets under management, has emerged with a controlling interest in the retailer after converting its ownership of Guitar Center debt into a 60% equity position. Former controlling shareholder Bain Capital booked a sizable loss and had its ownership stake trimmed to 40%. Bain acquired Guitar Center in 2007 for $2.1 billion, borrowing $1.6 million to finance the transaction. The recent recapitalization values the parent of Guitar Center, Music & Arts and Musician's Friend at a little over $1 billion.
Guitar Center CEO Mike Pratt commented, "We now have the necessary resources to expand our footprint and to invest in our people, stores, and product assortment. Guitar Center is well positioned to expand our multi-channel offering nationally and to significantly accelerate growth through new services and a strong focus on improving our customer experience."
The first step in the recapitalization process saw Guitar Center issue $615 million in five-year bonds with a 6.75% coupon and $325 million in ten-year bonds with a 9.875% coupon. The $940 million in proceeds was used to retire existing debt owned by Ares that carried interest rates between 11% and 12%. Ares forgave an additional $435 million in bonds with a 14% coupon in exchange for 60% ownership of the firm.
The combination of lower coupon bonds and debt forgiveness effectively reduced Guitar Center's debt burden by 35% and cut interest annual payments by $70 million, from 1.2 times cash flow to 0.8 times cash flow. Moody's Investment Service looked favorably on the transaction, upgrading Guitar Center's debt to B3 from Caa2 and downgrading the probability of default.
