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PostPosted: Fri Sep 01, 2017 4:33 am 
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Kramer Kingpin
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Rating Action: Moody's downgrades Gibson's CFR to Caa3; outlook negative
Global Credit Research - 17 Aug 2017
New York, August 17, 2017 --

Moody's Investors Service downgraded Gibson Brands, Inc.'s ("Gibson") Corporate Family Rating to Caa3 from Caa2, its Probability of Default Rating to Caa3-PD from Caa2-PD, and senior secured notes to Ca from Caa3. The rating action is due to Moody's concern with Gibson's weak operating performance, liquidity pressure from approaching maturities, and the view that the company's capital structure is unsustainable. The rating outlook is negative.

"We feel that Gibson's capital structure is unsustainable due to the uncertainty over its ability to refinance debt that comes due in July 2018 and August 2018 given its very high leverage and weak operating performance," said Kevin Cassidy, Senior Credit Officer at Moody's Investors Service. Debt/EBITDA is approaching 10 times. "Despite our expectation of debt reduction over the next year with the expected proceeds from asset sales, we think debt/EBITDA will remain high at around 8 times," noted Cassidy.

Moody's expects Gibson to significantly decrease its cost structure over the remainder of the year. This should eventually lead to sustained margin improvement, although there is uncertainty about the timing of when the benefits are realized. "We expect EBITDA to remain essentially flat this year as we think margin enhancements will not be enough to offset revenue declines," said Cassidy. 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.

Moody's downgraded the following ratings of Gibson Brands, Inc.:

Corporate Family Rating to Caa3 from Caa2;

Probability of Default Rating to Caa3-PD from Caa2-PD;

$375 million senior secured notes due 2018, to Ca (LGD 4) from Caa3 (LGD 4)

Outlook is Negative

RATING RATIONALE

Gibson's Caa3 Corporate Family Rating reflects the company's untenable capital structure given its high leverage, weak liquidity profile including negative free cash flow and significant refinancing risk, and the highly discretionary nature of its musical instrument and consumer electronics product lines. The company's high leverage at around 10 times debt/EBITDA at June 30, 2017 reflects weak operating performance trends and debt previously issued to fund acquisitions that have underperformed expectations. Moody's is also concerned that high turnover in the company's senior financial management level creates challenges to executing a quick operational turnaround. Gibson's ratings are supported by the company's strong brand recognition in musical instruments and market share for guitar products, and diversified product line within guitars and related music areas. The ratings are also supported by its geographic diversification.

The bulk of Gibson's debt matures in 2018 and liquidity is weak because Gibson is reliant on new external capital to refinance the maturities. Gibson's $375 million of outstanding senior secured notes mature August 1, 2018 and the maturity of roughly $145 million of outstanding secured bank loans will spring to July 23, 2018 if the notes are not refinanced by that date.

The negative outlook reflects the uncertainty about the company's ability to refinance its debt on acceptable terms and quickly execute an operational turnaround.

Ratings could be downgraded if the company does not refinance its debt obligations well before maturity, the company pursues a debt restructuring that Moody's would likely consider a default, or potential recovery values weaken. If revenue and earnings trends do not reverse and begin to stabilize ratings could also be downgraded.

The company needs to materially improve its operating performance and address its upcoming debt maturities before Moody's would consider an upgrade.

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Great Deals with MrWhipper, JoeyM, Del Hudson, skydive69 and Kramer Classic I :thumbs


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PostPosted: Fri Sep 01, 2017 9:16 am 
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Kramer Maniac
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That is sad.


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PostPosted: Fri Sep 01, 2017 10:35 am 
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Kramer Maniac
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Location: Springfield, OH
Corporate America falls under this pressure that market share must by all means necessary continue to grow. How much is too much? Well Gibson should be struggling with that question right now.
I speak for myself. I deal almost exclusively with the used guitar market and used car market. Could it be that the demand for new Gibsons is somewhat hindered by availability of quality used Gibsons?
What speaks to me most about the Moody report is the observation that the musical instrument line falls under the "high discretionary" category. :roll (I agree...but my "discretion" simply does not allow for such new prices)

That sort of opens the door for those of us with a little bit bigger budget than me.

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PostPosted: Fri Sep 01, 2017 2:26 pm 
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Kramer Kingpin
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Sell Kramer to ESP!!!

:headbang

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But let's face it, someone buys a Kramer b/c it has a Floyd.


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PostPosted: Fri Sep 01, 2017 3:31 pm 
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Kramer Kommander
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Location: Germany
Rating agencies... Working with a crystal ball, three bat wings, two pounds of goat liver and an old witch.

I mean these are the guys that saw greek bonds at AAA all the way till they popped. Worth zilch, your local seer gipsy will do much better.


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PostPosted: Sat Sep 02, 2017 7:55 am 
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Kramer Kingpin
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The rating methodology is indeed not flawless - to say the least - but then, sales figures of electric guitars (new not used) are decreasing for years now for all the big guns. If I´m not mistaken GC is around 1.6 bln. USD under water and many other shops don´t fare better as well.

You can say that a small portion of the decrease is compensated by the success of many many talented custom shop builders all over Europe and the United States but there´s sadly no denying that the interest in the guitar itself is dwindling. And who´s to blame the younger generation when a lot of the paramount guitar gods is nearing 60 or older already. The business is desperately lacking role models - even a guy like Russ Parrish is over 40 already. And as long as there´s no mass compatible gunslinger a renaissance of the instrument is nowhere near the horizon to be seen. Personally I thought that something like the combo Nuno/Rihanna was a great thing but in the age of music production via iPad stuff like that is scarce.

Anyways, I´m sure guitar driven music will survive this - in what shape or form, I don´t know, though shrug .

_________________
Practice cures most tone issues.

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Great Deals with MrWhipper, JoeyM, Del Hudson, skydive69 and Kramer Classic I :thumbs


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PostPosted: Sat Sep 02, 2017 1:03 pm 
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Kramer Maniac

Joined: Sat Apr 01, 2017 9:02 am
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Location: New York
Kickstart - I 100% agree with you. Things aren't like they were 30 years ago, and the music industry as a whole is suffering.

As for Kramer by Gibson I definitely think it's over. Gibson made all these acquisitions and put themselves in a ton of debt. This is what happens when you eliminate the board and have 1 man making risk management decisions. They are going to look to avoid bankruptcy and try to restructure their debt. I know the Gibson CEO is a control freak and will not be looking to take on any equity investments (Fender is private equity owned). I have no clue what type of covenants their loans carry, or what restrictions are on them, but they will probably look for cost synergies across brands, layoffs, cutting off products, etc. as part of the restructuring. This is, if they even can avoid defaulting / bankruptcy/ debt to equity. Unfortunately any way you look at it I think that will spell the end of the Kramer brand.


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PostPosted: Sun Sep 03, 2017 6:52 am 
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Kramer Kommander
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Well, maybe they'll sell Kramer and some other lesser brands they own. There's always hope...


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PostPosted: Wed Apr 11, 2018 9:49 am 
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sixstring wrote:
Sell Kramer to ESP!!!

:headbang


That would make the most sense from a history perspective, but does the Kramer name hold any value to ESP?


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