Moody's ups Guitar Center to Ba2

Moody's Investors Service said it upgraded the corporate family rating of Guitar Center, Inc. to Ba2 from Ba3 and moved the outlook to stable from positive.

The agency said the upgrade acknowledges Guitar Center's continued track record of solid operating performance and a recent reduction in leverage following the conversion of all of the company's $100 million 4% senior convertible notes into common stock.

The ratings and stable outlook are reflective of Guitar Center's very narrow product focus in the music products industry, very high seasonality and relatively moderate scale with fiscal 2005 revenues of nearly $1.8 billion, Moody's said. The ratings are also weighted down by the ongoing challenges at the company's Music & Arts Center division, which currently generates negative operating income; by the company's desire to continue its high growth rate by expanding the Guitar Center concept outside its historic demographic into secondary and tertiary markets, which generate a lower level of sales; and the company's high growth strategy.

The ratings are supported by Guitar Center's conservative balance sheet, healthy profitability, history of modest debt-financed acquisitions, national geographic diversification, market position as the largest retailer of musical instruments and recording tools within the United States and the external liquidity provided by a $200 million asset-based revolver, the agency added.

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