PE-backed Guitar Center Is Said to Be Near Bankruptcy Petition

Guitar Center, the country’s biggest musical instrument retailer, is close to completing a prepackaged bankruptcy with backing from a majority of its creditors, a media report says.

Guitar Center would join a parade of retailers that have failed during the coronavirus pandemic. That includes iconic names J.C. Penney in department stores, Brooks Brothers in affluent apparel and Pier One in furniture.

The music company’s Chapter 11 bankruptcy filing could come as soon as this weekend, knowledgeable sources told Bloomberg. The stores would remain open during the bankruptcy proceedings, the news service reported.

Founded in 1964, Guitar Center is backed by the New York private-equity firm Ares Capital. It has about 300 stores nationwide. It also owns Music & Arts, which has more than 200 stores for band and orchestral instruments. The company also offers lessons and rentals. 

As part of the bankruptcy effort, Guitar Center would reduce its debt burden, as some creditors swap their holdings for some of the reorganized equity, Bloomberg’s sources said.

One major casualty of retail’s downfall is malls. 

Simon Property Group  – Get Report, the nation’s biggest mall owner, has seen its share price drop 51% year to date. To be sure, it has rebounded 19% this week amid the prospect of a covid vaccine.

SPG shares recently traded at $73.75, up 6.67%.

Morningstar analyst Kevin Brown thinks Simon is vastly undervalued. “While operating fundamentals for Simon worsened in the third quarter, the decline was in line with our expectations,” he wrote after the company’s earnings report this week. 

“As a result, we are maintaining our $152 fair value estimate for the no-moat company.”

He said “we find it encouraging for Simon’s long-term outlook that the company is able to tap the debt market at low interest rates. … Given that the company is still producing significant positive cash flow even in these difficult times, we don’t foresee any significant issues for Simon’s financial health in the near future.”

Source: The Street