December 16, 2020 – In anticipation of their scheduled December 17th Plan confirmation hearing, the Debtors filed an amended prepackaged Plan of Reorganization and a related redline showing changes to version filed on November 21, 2020 [Docket Nos. 282 and 286, respectively]. Also filed were (i) revised Plan voting results [Docket No. 272], (ii) the Debtors' memorandum in support of Plan confirmation (the "Memorandum") [Docket No. 253], (iii) a Second Amended Plan Supplement [Docket No. 280, with List of Officers and Directors] and (iv) a proposed Plan confirmation order [Docket No. 288].

RSA and Prepackaged Plan Overview

The Memorandum provides the following pre-Plan confirmation hearing summation: "The Plan is the result of extensive good faith negotiations between the Debtors and their key stakeholders, provides for a comprehensive and value-maximizing restructuring of the Debtors and is being implemented through a ‘straddle pre-pack’ structure. The efficient timeline provided by this structure will minimize the uncertainty of the Debtors having to operate under bankruptcy protection while simultaneously ensuring a robust voting period for the Voting Classes (as defined below). 

Among other things, the Plan will allow the Debtors to:

(a) obtain a $165 million equity investment from the Investor Support Parties (subject to reduction to no less than $150 million); 

(b) pay holders of Allowed General Unsecured Claims in full or otherwise leave them unimpaired; 

(c) pay holders of Superpriority Secured Notes Claims in full in Cash; 

(d) provide holders of Secured Notes Claims with $450 million in Cash and $160 million in New Preferred Equity;

(e) provide holders of Unsecured Notes Claims with $2 million in New Junior Preferred Equity; and 

(f) obtain exit financing in the form of a $375 million New ABL Facility and $350 million in New First Lien Debt. 

The de-leveraging transactions contemplated by the Plan will eliminate approximately $800 million in funded debt from the Reorganized Debtors’ balance sheet and provide for excess liquidity of approximately $100 million, positioning the Debtors to improve their financial condition and overall creditworthiness and emerge from chapter 11 a stronger, better capitalized company—a remarkable result for a retail company in the current environment. The Plan has the overwhelming support of the Debtors’ economic stakeholders, including the Creditor Support Parties and the Sponsor Support Party, as well as the support of the other Investor Support Parties. With their balance sheet right-sized, the Reorganized Debtors will be able to continue as the leading United States retailers of musical instruments and related products and services."

The Disclosure Statement [Docket No. 15] provides: “After more than three (3) months of diligence and arms’ length negotiations with their creditors, the Debtors reached an agreement with the Creditor Support Parties, and the Investor Support Parties, who collectively hold, in aggregate: (a) 100% of the Superpriority Secured Notes; (b) more than 71% of the Secured Notes; (c) more than 84% of the Unsecured Notes; and 100% of the Existing Common Equity [NB: The RSA is attached to the Disclosure Statement at Exhibit B].

As set forth in the Restructuring Support Agreement, the Debtors and the Support Parties agreed to mutually support confirmation of the Plan and the consummation of the Restructuring Transactions, which contemplates, among other things:

1. the entry into the $325 million Term DIP Facility, which will be refinanced with the proceeds of the New Common Equity investment, the New First Lien Debt and/or the New ABL Facility, with Claims arising from the Term DIP Facility to be repaid in full in cash on the Effective Date;
2. the entry into the $50 million ABL DIP Facility, which will be refinanced with the proceeds of the New ABL Facility, with any Claims arising from the ABL DIP Facility to be repaid in full in cash on the Effective Date;
3. the entry, upon emergence from the Chapter 11 Cases, into the $375 million New ABL Facility;
4. the issuance, upon emergence from the Chapter 11 Cases, of the $335 million [now $350.0mn] New First Lien Debt;
5. the issuance, upon emergence from the Chapter 11 Cases, of $160 million in New Preferred Equity to satisfy, along with an aggregate $450 million cash distribution, Secured Notes Claims (whose holders may further elect to participate in a “cash out” option for up to $30 million of their New Preferred Equity);
6. the issuance, upon emergence from the Chapter 11 Cases, of $2 million in New Junior Preferred Equity to the holders of prepetition Unsecured Notes;
7. the $165 million New Common Equity investment by the Investor Support Parties (subject to reduction following a Triggering Event to no less than $150 million pursuant to Section 11(g) of the Restructuring Support Agreement) in exchange for: (a) 100% of the common equity of the Reorganized Company, to be issued upon emergence from the Chapter 11 Cases and subject to dilution by a new management incentive plan, new warrants and all subsequent issuances of common equity; and (b) Warrants to purchase New Common Equity;
8. the satisfaction of Prepetition ABL Claims by the Effective Date;
9. the satisfaction of Superpriority Secured Notes Claims by the Effective date; and 
10. the unimpairment of General Unsecured Claims.”

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; see also the Liquidation Analysis below)

• Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Total projected claims are <$1.0mn and projected recovery is 100%. Each holder of an Other Priority Claim that is allowed as of the Effective Date shall receive payment in full in cash.
• Class 2 (“Prepetition ABL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Total projected claims are $269.0mn and projected recovery is 100%. Each holder of an Allowed Prepetition ABL Claim, to the extent not previously satisfied during the Chapter 11 cases (including from proceeds of the DIP Facilities or by being deemed issued, reissued or otherwise novated to the ABL DIP Facility), shall be paid in full on the Effective Date or as soon as practicable thereafter.
• Class 3 (“Superpriority Secured Notes Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Total projected claims are $42.0mn (principal and interest) and projected recovery is 100%.  Each holder of an Allowed Superpriority Secured Notes Claim shall receive payment in full in cash on the Effective Date or as soon as practicable thereafter.
• Class 4 (“Secured Notes Claims”) is impaired and entitled to vote on the Plan. Total projected claims are $676.0mn and projected recovery is 90%.  Each holder of an Allowed Secured Notes Claim shall receive on the Effective Date (or as soon as practicable thereafter) its Pro Rata share of the Secured Notes Claims Distribution.
• Class 5 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Total projected claims are <$1.0mn and projected recovery is 100%. Each holder of an Other Priority Claim that is allowed as of the Effective Date shall receive payment in full in cash.
• Class 6 (“Unsecured Notes Claims”) is impaired and entitled to vote on the Plan. Total projected claims are $385.1mn and projected recovery is 0.5%.  Each holder of an Allowed Unsecured Notes Claim shall receive its Pro Rata share of the Unsecured Notes Claims Distribution on the Effective Date or as soon as practicable thereafter.
• Class 7 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Total projected claims are $75.0mn and projected recovery is 100%. Each holder of an Other Priority Claim that is allowed as of the Effective Date shall receive payment in full in Cash.
• Class 8 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Total projected claims are N/A and projected recovery is N/A.
• Class 9 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Total projected claims are N/A and projected recovery is N/A.
• Class 10 (“Existing Common Equity”) is impaired, deemed to reject and not entitled to vote on the Plan. On the Effective Date, all Existing Common Equity shall be cancelled and no holder of any Existing Common Equity shall receive any distribution nor retain any property or other value on account of such Interests.

Voting Results

On December 15, 2020, the claims agent notified the Court of the Plan voting results [Docket No. 272] which were as follows:

• Class 4 (“Secured Notes Claims”): 78 claim holders, representing $474,872,370.07 (or 80.84%) in amount and 64.46% in number, accepted the Plan. 43 claim holders, representing $112,530,000.00  (or 19.16%) in amount and 35.54% in number, rejected the Plan.
• Class 6 (“Unsecured Notes Claims”): 80 claim holders, representing $326,834,632.00 (or 98.73%) in amount and 97.56% in number, accepted the Plan. 2 claim holders, representing $4,202,263.00 (or 1.27%) in amount and 2.44% in number, rejected the Plan.

The following documents were attached to the Disclosure Statement [Docket No. 15]:

• Exhibit A: Plan
• Exhibit B: Restructuring Support Agreement
• Exhibit C: Corporate Structure Chart
• Exhibit D: Financial Projections
• Exhibit E: Liquidation Analysis

Liquidation Analysis (see Exhibit E to Disclosure Statement [Docket No. 15] for notes)

About the Debtors

According to the Debtors: “The Debtors operate two business segments: the “Guitar Center” and “Music & Arts” business. In total, the Debtors’ operate over 510 stores and employ approximately 13,000 people.

The Guitar Center segment offers new, used and vintage guitars, amplifiers, percussion instruments, keyboards, live sound, DJ, and recording equipment through retail stores and online, along with lessons, repair services, and instrument rentals offered in the Debtors’ stores. The Guitar Center segment also includes Guitar Center Professional, AVDG, “Musician’s Friend”, and “Music 123” branded website. As of the date of this Disclosure Statement, the Debtors operate 296 Guitar Center stores across the United States, as well as the guitarcenter.com website.

The Music & Arts segment specializes in rentals and sales of band and orchestra music equipment to students, parents, schools and educators. Most of the Debtors’ Music & Arts stores provide music lessons and also sell a limited assortment of guitars, amplifiers, percussion instruments, and keyboards. The Music & Arts segment also includes the Woodwind and Brasswind e-commerce and catalogue business that specializes in sales of band and orchestra instruments. As of the date of this Disclosure Statement, the Debtors’ Music & Arts business operates 229 stores across the United States, as well as the musicarts.com and wwbw.com branded websites.”

The Debtors operated as a public company until October 2007 when entities substantially owned by affiliates of Bain Capital Partners, LLC (“Bain Capital”) and a co-investor acquired ownership of the Debtors. In 2014, the Debtors undertook a series of transactions to restructure their capitalization. As part of this recapitalization, Ares — which held certain of the Debtors’ notes at the time — acquired majority ownership of the outstanding voting securities. Then in December 2017, Ares purchased all of the common shares owned by Bain Capital and its co-investor. Ares is now the owner of substantially all of the outstanding voting equity.

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