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Ares Management To Swap Debt For 70% Ownership of Guitar Center

...from Moody’s Investors Service, proceeds from the bond sale will be used to pay down a $616 million loan that Bain Capital advanced when it acquired Guitar Center in 2007. The remaining funds will be used to pay down approximately $295 million of bonds with a current interest rate of 11.5%. A debt specialist familiar with the transaction said that the new five-year bonds would have an interest rate of 7% and the ten-year issue would have a 10% interest rate.

Ares Management, which owns a majority of Guitar Center bonds and loans, will reportedly convert $535 million in unsecured debt into equity, giving it a 70% stake in the company. Bain Capital will retain a 30% interest. Christopher Bennett, Guitar Center’s vice president of communications, said management couldn’t discuss the specifics of the transaction until it was completed. However, he added, “We view this as a very positive development and are excited to be working with Ares.”

Bennett’s optimistic comments are based on the fact that the transaction will reduce Guitar Center’s leverage by 35% and trim $145 million in annual interest expense. The combination of lower interest bonds and Ares debt forgiveness will significantly improve Guitar Center interest coverage. Currently, the retailer’s earnings before interest, taxes, depreciation, and amortization (EBITDA) are equal to 0.6 times annual interest expense. After the transaction, EBITDA will equal 1.2 times interest expense. The new financing also extends Guitar Center’s debt maturities. The earliest principal payments are now due in 2019 instead of 2016 currently.

The bond sale is being managed by Bank of America, Deutsche Bank, J.P. Morgan, and RBC.

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