These are worrying times for Gibson as a recent article on CNN claims. But has Gibson lost its mojo!
According to CNN the rating agency S&P downgraded Gibson Brands on Wednesday. The downgrade has come over concerns that Gibson may default on more than $500 million of corporate debt this summer. The Gibson rating has been lowered from the rather poor CCC rating to CCC-minus which indicates that a default is imminent.
CNN indicate that Gibson has $145 million in outstanding bank loans that will come due in July and another $377 million of secured notes maturing in August.
The report from S&P states that –
“With multiple maturities looming and operating weakness ongoing, we believe Nashville based Gibson Brands could default on its debt obligations over the next six months”.
Why has Gibson lost its mojo and what are the reasons behind their current troubles?
The report from CNN cites the “lingering effects” of regulations on the import and export of rosewood. The new regulations were implemented to stop the illicit trade in Rosewood. However, a perhaps unintended consequence of the regulations is that guitar manufacturers have found their businesses hit by an extra layer of regulation. This slowed down the guitar industry as a whole last year according to IbisWorld, which tracks the guitar industry.
But, we can’t see that the troubles at Gibson can be wholly attributed to additional regulations on rosewood. It has been quoted that Gibson’s revenues have dropped from $2.1 to $1.7 billion dollars over the last few years and this decline started before the new rosewood regulations.
It is more the strategic decisions that the company has taken that have led to their current position. Take for example the decision by Gibson in 2014 to purchase the Philip’s Audio Division. This was seen by some in the music industry as a surprising departure from the Gibson core business and has laden the company with a sizeable debt. The unfortunate drop in revenues, which is perhaps more due to a drop in demand for high end guitars than issues with Rosewood, then makes it very difficult to pay that debt back. From there it is a viscous circle where high debt has led to poor credit ratings which then increases the costs to service that debt.
What will be the conclusion of this current troubled phase in the history of Gibson?
Gibson of course have stated that they are confident that they will be able to refinance, especially since the company is improving its profitability and recently paid down $20 million in debt. But with both S&P and Moody’s describing Gibson as a “substantial credit risk” and describing their capital structure as “unsustainable” the future is looking bleak.
Ultimately Gibson need to refinance its debt, which has become an even more challenging feat with this fresh downgrade from S&P. Gibson Brands said it was working with Jefferies Investment Bank to pursue all refinancing possibilities.
However, another option, if it chooses to default, is to file for Chapter 11 bankruptcy protection. Whatever the conclusion this story has some way to go and we will be watching it with interest.
Over to you…
What do you think, has Gibson lost its mojo? What in your opinion is the causes of Gibson’s current predicament? We would love to hear your views and don’t forget to cast your vote in our poll below.