Moody's cuts Guitar Center

Moody's Investors Service said it downgraded Guitar Center Holdings, Inc.'s corporate family and probability of default ratings to Caa2 from Caa1 and Guitar Center, Inc.'s $650 million senior secured term loan to Caa1 (LGD 3, 34%) from B3 (LGD 3 35%). The SGL-3 speculative grade liquidity rating was affirmed.

The outlook is stable.

The agency said it downgraded the ratings because Guitar Center will begin to pay cash interest on its senior pay-in-kind notes in April, significantly increasing its cash interest burden. While Guitar Center's sales have begun to show signs of improvement, Moody's does not expect the company's earnings to improve sufficiently during 2011 that it can fully cover its interest expense through internally generated cash flow.

The Caa2 ratings reflect Guitar Center's highly leveraged capital structure, heavy interest burden and the agency's view that the capital structure is unsustainable over the medium term at current levels of operating performance. Moody's believes that Guitar Center could voluntarily pursue a debt restructuring or an amendment to its debt facilities on terms that the agency would deem to be a distressed exchange.

However, Moody's said Guitar Center's liquidity is adequate and there are no sizable debt payments until April 2013.

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