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
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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