Barnes and Mullins

Barnes and Mullins

Moody’s downgrades Gibson again

Ratings agency Moody’s has downgraded Gibson Brands Inc once again and has set its forecast to ‘negative’ for the combative US company.
On 17th August Moody’s Global Credit Research reduced the company’s ‘Corporate Family Rating’, saying: ‘ 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’.
Moody’s says it 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’.

Gibson 335
Gibson 335

Gibson’s troubles will inevitably lead to speculation about the company’s long-term future. With brands including Gibson, Epiphone, Tascam, Baldwin pianos, Philips USA, Onkyo (which includes Pioneer), Stanton, Cerwin Vega, KRK and Cakewalk, predators are likely to be assessing the company for a potential breakup.
Meanwhile, Gibson continues to aggressively pursue its trademark claims in the US courts, most recently against JAM Industries’ Hamer brand but with a potentially greater trademark battle looming over an attempt to trademark the 335 shape, which is contested by 17 other guitar makers.


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