Gibson Bankruptcy Predictions Circulate Over Weekend: What Do They Really Mean?

If you spend any time following guitar and gear news, then you know that criticisms and conjecture surrounding Gibson's business decisions are nothing new. Indeed, whenever we post any sort of announcement about a new Gibson model, the comments section is usually filled with prognostications on how the historic manufacturer's latest release will undoubtedly hasten its downward trajectory.

This past week, however, a number of news sources outside the musical instruments industry have been reporting on a series of financial realities on Gibson's corporate horizon that could spell serious trouble for the historic firm and its current leadership.

The story was first covered by the Nashville Post and was picked up over the weekend by publications including CNBC, Variety, NME, and others.

Most pressingly, Gibson faces the maturation of $375 million in senior secured notes over the next six months, which will be followed by the collection of $145 million in bank loans if the first set of notes aren't repaid or refinanced by July 23.

Much of this debt, it's worth noting, comes from Gibson's efforts to bring new brands into its portfolio over the past several years, including the acquisition of Philips Electronics in 2014. This move was part of an overall diversification strategy that goes well beyond Gibson's core guitar business, which remains stable.

This latest round of debt payments follows the recent departure of Gibson CFO Bill Lawrence, who was only with the company for about a year, as well as a series of other loans and restructurings that have left some bondholders feeling uneasy, according to reports.

In response to these obligations, most observers have pointed out that Gibson's longtime CEO Henry Juszkiewicz can either seek to exchange the company's debt, trade in some portion of his equity in the company as a form of payment, or proceed to bankruptcy court. In pursuit of the first option, Gibson has already contracted Jeffries investment bank to help with a potential refinancing, though this may not actually be feasible given its current set of obligations.

The initial Nashville Post article explaining the situation quotes Moody's Investors Services senior credit officer Kevin Cassidy, who downgraded Gibson's debt rating last year.

"This year is critical and they are running out of time—rapidly," Cassidy said. "And if this ends in bankruptcy, he will give up the entire company."

"Some type of restructuring will be necessary," Cassidy further explained. "The core business is a very stable business, and a sustainable one. But you have a balance sheet problem and an operational problem."

Cassidy's point regarding the stability of Gibson's core business is important to emphasize. While many other publications have pointed to a general lessening of interest in guitars in popular culture as the key catalyst behind the current situation, Gibson's guitar business remains profitable and important to the industry at large.

Gibson—which sees annual revenues of more than $1 billion— issued a press release late last week to address these mounting concerns and respond to these initial reports. According to Gibson, the company "has met all current obligations to the bondholders, is in the process of arranging a new credit facility to replace the bonds, and fully expects the bonds to be refinanced in the ordinary course of business."

The release also included this explanation from Juszkiewicz regarding the strategic way forward for his company: "We have been monetizing assets like stock holdings, real property and business segments that could not achieve the level of success we expected. By monetizing these assets, we can reduce debt and generate funds to contribute to business segments that are thriving. It is important to our business to get back to the financial success we had to achieve the best financial terms in the refinancing of our company."

As far as steps to monetize assets and streamline operations, Juszkiewicz may be referring to the sale of several pieces of real estate including Gibson's Memphis Factory last year, as well as the recent closure of Cakewalk, a digital music software subsidiary.

For broader context, while the current management of Gibson faces significant financial hurdles, this is not the first period of uncertainty in the company's 116-year history. Juszkiewicz, for example, took over leadership of the business with partners in the mid-1980s following a decade-long period of decline that saw the relocation of the operations from Kalamazoo, Michigan, to Nashville, Tennessee.

This acquisition was followed by the opening of new facilities in Memphis, Tennessee, and Bozeman, Montana, the launch of the much-celebrated Gibson Custom Shop, as well as an expansion of overseas Epiphone production as a lower-priced entry-point for Gibson fans.

Similarly, while this current chapter may initiate some restructuring or perhaps a change of management, it seems unlikely that Gibson as a major brand within the guitar industry will simply cease to exist. More likely, this phase will serve as a catalyst to the next chapter in Gibson's long and storied history of building some of the best guitars in the world.

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