Guitar Center, Inc. – Seeks Authority for Pair of DIP Facilities Totaling $375mn from Noteholders and Prepetition ABL Lenders; $279mn of Which Would Repay Prepetition ABL Debt

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November 22, 2020 – The Debtors requested Court authority to (i) access debtor-in-possession (“DIP”) financing and (ii) use cash collateral [Docket No. 33]. 

The proposed DIP financing includes two sources of DIP financing, (a) a term DIP facility (the "Term DIP Facility") and (b) an ABL DIP facility (the "ABL DIP Facility" and together with the Term DIP Facility, the "DIP Facilities"). The Term DIP Facility, provided by the holders of a majority of the Debtors' Secured Notes and the Superpriority Secured Notes (the "Term DIP Commitment Parties"), consists of a $325.0mn term loan and the ABL DIP Facility, provided by the Prepetition ABL Agent, consists of a $50.0mn ABL facility. 

All of the requested financing would be made available with an interim DIP order, with proceed of the DIP Facilities to be used for working capital, other general corporate purposes and the payment in full in cash of the Prepetition ABL Obligations ($279.0mn), and payment of certain other permitted prepetition claims.

DIP Marketing Efforts

In a declaration in support of the DIP financing [Docket No. 31], the Debtors' investment banker provides: "Beginning in October 2020, the Debtors and Houlihan sought alternative DIP financing packages from potential third-party lenders on more favorable terms. 

The Debtors’ advisors contacted 20 financial institutions to solicit offers for providing DIP financing to the Debtors on a junior lien basis and/or a priming basis….The Debtors then received term sheets from 4 of these potential lenders. 

In spite of these efforts and multiple rounds of telephonic conversations with each of the potential lenders who had executed NDAs, none of the third parties ultimately was able to submit a viable alternative proposal for DIP financing. No potential third-party lender was willing to provide debtor-in-possession financing to the Debtors on an unsecured basis or junior to the obligations owed to the Prepetition Secured Lenders. Instead, each potential lender providing feedback on a potential financing proposal indicated that they would require priming liens on the Debtors’ assets…After numerous rounds of negotiations over the course of several weeks, during which the Debtors and their advisors endeavored to obtain the best possible DIP financing for the Debtors, the parties have arrived at the proposed $325 million term loan provided by the Term DIP Commitment Parties. During this process, the Debtors and their advisors also negotiated extensively with the Prepetition ABL Agent to secure a $50 million ABL DIP Facility to fund these cases. 

The relative attractiveness of the DIP Facilities was even more pronounced by the fact that the vast majority of the Debtors’ assets are encumbered by liens granted to the Prepetition Secured Lenders, such that any potential third-party financing would have to be either fully or partially unsecured, be on a juniorbasis, or “prime” the Prepetition Secured Lenders’ liens."

The DIP motion continues: "Concurrently with ‘shopping' postpetition financing to the financial community at large, the Debtors approached key holders in its existing capital structure to explore financing options in the build up to the execution of the Restructuring Support Agreement. The ad hoc group of secured noteholders represented by Stroock & Stroock & Lavan LLP and McGuireWoods LLP, as counsel, and Province, Inc., as financial advisor (the ‘Ad Hoc Group of Secured Noteholders’) that collectively holds a majority of the Secured Notes and the Superpriority Secured Notes, together with certain other holders of Superpriority Secured Notes (collectively, the ‘Term DIP Commitment Parties’), proposed a term sheet for the Term DIP Facility, as an integrated part of a broader restructuring transaction. 

The Debtors, with the assistance of their advisors, evaluated the proposal, considering, among other factors: the terms and conditions in light of Debtors’ needs; the proposed economics; the perceived ability of the proposed lenders to fully commit and underwrite the facility; the proposed financing structure(including the use of proceeds to repay in full the Prepetition ABL Obligations); the perceived deal risk; and the proposed covenants.

Key Terms of the Term DIP Facility:

  • Borrower: Guitar Center, Inc.
  • DIP Lenders: Each of the Lenders as set forth in the Term DIP Credit Agreement, and such other entities that may become Lenders in accordance with the terms of the Term DIP Loan Documents.
  • Commitment: The Term DIP Facility shall include term loans in the aggregate principal amount of $325.0mn.
  • Interest Rate: 7.00% per annum.
  • Default Interest: An additional 2.00% per annum payable in cash.
  • Payments and Fees: The Term DIP Facility provides for the payment of certain payments, including a Commitment Payment paid in Cash on November 18, 2020, and an Exit Payment payable on the maturity date of the Term DIP Facility or on the date of any earlier voluntary or mandatory prepayment or Exit Payment Other Event (as defined in the Term DIP Credit Agreement) and certain Agency Fees, each of which as set forth in the Term DIP Loan Documents.
  • Use of Proceeds and Cash Collateral: The Debtors shall be permitted to use the proceeds of the DIP Facilities and Cash Collateral only for the following purposes: (a) to pay in cash in full the Prepetition ABL Obligations in accordance with the Prepetition ABL Payoff Letter (as defined in the Interim Order); (b) to finance the DIP Borrower and its operations in accordance with the Approved Budget, (c) to fund the DIP Loan Parties’ general corporate and working capital purposes in accordance with the Approved Budget; (d) to pay interest, payments, fees, costs and expenses related to the applicable DIP Facility and required by the applicable DIP Credit Agreement (including the fees and expenses of Lender Professionals); (e) to make all permitted payments of costs of administration of these cases as permitted by the DIP Orders; (f) to satisfy any adequate protection obligations owing under the DIP Orders; (g) to make any other payments permitted by the Approved Budget (including the payment of interest, other payments, fees, costs and the allowed expenses of professionals retained by the Debtors); (h) payment of obligations arising from or related to the Carve Out; and (i) to pay Transaction Expenses (as defined in the Restructuring Support Agreement).
  • Milestones:
    • Deadline for motion seeking approval of Disclosure Statement: 1 calendar day after the Petition Date 
    • Deadline for final DIP order: 45 calendar days after the Petition Date
    • Deadline for order approving Disclosure Statement: 45 calendar days after the Petition Date
    • Deadline for Plan confirmation: 45 calendar days after the Petition Date
    • Deadline for Plan effectiveness: February 1, 2021 

Key Terms of ABL DIP Facility:

  • Borrower: Guitar Center, Inc.
  • DIP Lenders: Wells Fargo and such other entities as may become Lenders in accordance with the terms of the ABL DIP Loan Documents.
  • Commitment: Revolving loan credit facility of up to $50.0mn in aggregate.
  • Interest Rates: 
  • Base Rate: highest of (a) Federal Funds Rate plus ½%, (b) the LIBO rate plus 1%, and (c) Wells Fargo “prime rate,” provided that, in no event shall the Base Rate be less than 1.50%; plus 1.75% per annum.
  • LIBO Rate: LIBO plus 2.75% per annum.
  • Default Interest: An additional 2.00% per annum payable in cash.
  • Borrowing Base: 90% on eligible credit card Accounts Receivable, plus 85% of eligible Trade Accounts Receivable, plus the lesser of (a) 90% of NOLV, or (b) 75% of eligible inventory; minus Applicable Reserves.
  • Payments and Fees: In consideration for the services of the ABL DIP Agent and the ABL DIP Lenders, as applicable, the ABL DIP Facility provides for the payment of certain fees, each of which are set forth in the ABL DIP Loan Documents.
  • Use of Proceeds and Cash Collateral: As above.
  • Milestones: As above.

Prepetition Indebtedness

As at filing, the Debtors had outstanding funded debt in the aggregate principal amount of approximately $1,329.8mn under five financing arrangements (one of which is an intercreditor agreement and each described further below). This funded debt includes: (i) $269.0 million in borrowings and approximately $7.6 million of letters of credit under the Debtors' Prepetition ABL Facility, (ii)  $35.7 million of obligations outstanding under the Debtors' 10.000% Senior Secured Superpriority Notes due 2022, (iii) $640.0 million outstanding under the Debtors' 9.500% Senior Secured Notes due 2021, (iv) $5.8 million of obligations outstanding under the Debtors' 2018-issued 13.000% Cash/PIK Notes due 2022 and (v) $379.3 million of obligations outstanding under its 2020-issued 13.000% Cash/PIK Notes due 2022.

  • Prepetition ABL Facility: The Debtors are party to November 2014 asset-based revolving credit agreement (the “Prepetition ABL Facility”) with Wells Fargo Bank, National Association, as agent (the “Prepetition ABL Agent”), The Prepetition ABL Facility provided for a senior secured revolving credit facility, with a maximum availability of $375.0 million, subject to a borrowing base (and as reduced by the level of outstanding letters of credit). As of November 19, 2020, approximately $269.0 million in borrowings and approximately $7.6 million of letters of credit were outstanding under the Prepetition ABL Facility.

The obligations of the borrowers and guarantors under the Prepetition ABL Facility are secured by (a) a first- priority lien on the Debtors’ inventory, accounts receivable, cash and deposit accounts, and proceeds of the foregoing (the “Prepetition ABL Priority Collateral”), and (b) a third-priority lien on the Debtors’ capital stock, intellectual property, and other assets that do not constitute Prepetition ABL Priority Collateral and proceeds of the foregoing (the “Prepetition Notes Priority Collateral”), in each case, subject to certain permitted liens and exceptions.

  • Superpriority Secured Notes: Further to a May 2020 indenture (The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent”) between Guitar Center, as issuer, the other Debtors, as guarantors, Guitar Center has an aggregate principal amount of approximately $35.7 million of obligations outstanding under its 10.000% Senior Secured Superpriority Notes due 2022 (the “Superpriority Secured Notes”). The Superpriority Secured Notes are subject to a Repayment Premium of 17.50% of the aggregate principal amount of Superpriority Secured Notes redeemed, accelerated (including upon the occurrence of a bankruptcy or insolvency event) or otherwise repaid.

The obligations under the Superpriority Secured Notes are secured by (a) a first-priority lien on the Prepetition Notes Priority Collateral, (b) a second-priority lien on the ABL Priority Collateral, in each case, subject to certain permitted liens and exceptions, and (c) generally, as between the Superpriority Secured Notes and the Prepetition Senior Secured Notes (as defined below), first priority liens on and security interests in all “Shared Collateral,” as defined in the Notes Intercreditor Agreement (as defined below), in which the agent for the Superpriority Secured Notes and the agent for the Secured Notes both hold security interests.

  • Secured Notes: Further to a March 2018 indenture (The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, Guitar Center has an aggregate principal amount of approximately $640.0 million outstanding under its 9.500% Senior Secured Notes due 2021 (the “Secured Notes”). 

The obligations under the Secured Notes are secured by (a) a third-priority lien on the Prepetition ABL Priority Collateral, (b) a second-priority lien on the Prepetition Notes Priority Collateral, in each case, subject to certain permitted liens and exceptions and (c) generally, as between the Superpriority Secured Notes and the Prepetition Senior Secured Notes, second priority liens on and security interests in all “Shared Collateral,” as defined in the Notes Intercreditor Agreement, in which the agent for the Superpriority Secured Notes and the agent for the Secured Notes both hold security interests.

  • Prepetition Intercreditor Agreements: The Prepetition ABL Agent, the Superpriority Secured Notes Trustee, and the Secured Notes Trustee are parties to an amended and restated intercreditor agreement, dated May 15, 2020, (the “Secured Parties’ Intercreditor Agreement”), acknowledged by the Debtors, which governs: (1) the relative lien priorities of the secured parties with respect to the Prepetition ABL Facility, the Superpriority Secured Notes, and the Secured Notes; (2) the rights of the respective secured parties to take enforcement actions against collateral; and (3) waivers of certain rights of certain of the secured parties with respect to, among other things: (a) the provision of debtor-in-possession financing to the Debtors; (b) the ability to seek adequate protection under the Bankruptcy Code; and (c) the ability to contest certain asset sales in a bankruptcy case.

In addition, the Superpriority Secured Notes Trustee and the Secured Notes Trustee are also parties to the Intercreditor Agreement, dated May 15, 2020 (the “Notes Intercreditor Agreement” and, together with the Secured Parties’ Intercreditor Agreement, the “Intercreditor Agreements”), acknowledged by the Debtors, which contain provisions setting forth, among other things: (1) the relative lien priorities as between the Superpriority Secured Notes and the Secured Notes; (2) the rights of the parties to take enforcement actions against collateral; and (3) waivers of certain rights of certain parties with respect to, among other things: (a) the provision of debtor-in-possession financing to the Debtors; (b) the ability to seek adequate protection under the Bankruptcy Code; and (c) the ability to contest certain asset sales in a bankruptcy case.

  • Unsecured Notes: Further to an April 2018 indenture (The Bank of New York Mellon Trust Company, N.A. as trustee), Guitar Center has an aggregate principal amount of approximately $5.8 million of obligations outstanding under its 2018-issued 13.000% Cash/PIK Notes due 2022 (the “2018 Unsecured Cash/PIK Notes”). On May 15, 2020, the indenture governing the 2018 Unsecured Cash/PIK Notes was amended by a supplemental indenture that, among other things, released each of the subsidiary guarantees of the 2018 Unsecured Cash/PIK Notes and eliminated or modified substantially all of the restrictive covenants with respect to the 2018 Unsecured Cash/PIK Notes. Accordingly, as of the date of this Disclosure Statement, the 2018 Unsecured Cash/PIK Notes were solely the unsecured obligations of Guitar Center, and were not guaranteed by any other Debtors.

In addition, further to a May 2020 indenture (Wilmington Savings Fund Society FSB, as trustee; having replaced The Bank of New York Mellon Trust Company, N.A.), Guitar Center has an aggregate principal amount of approximately $379.3 million of obligations outstanding under its 2020-issued 13.000% Cash/PIK Notes due 2022 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “2020 Unsecured Cash/PIK Notes”, and together with the 2018 Cash/PIK Notes, the “Unsecured Notes”). The 2020 Unsecured Cash/PIK Notes were issued in a series of exchanges for approximately $354.2 million in aggregate principal amount of 2018 Unsecured Cash/PIK Notes in the 2020 Refinancing Transactions.

On July 7, 2020, holders of more than 50% in aggregate amount of the then-outstanding 2020 Unsecured Cash/PIK Notes removed The Bank of New York Mellon Trust Company, N.A. as trustee of the 2020 Unsecured Cash/PIK Notes and appointed Wilmington Savings Fund Society FSB as successor trustee (in such capacity, the “2020 Unsecured Notes Trustee”) of the 2020 Unsecured Cash/PIK Notes.

Interim Budget (see Exhibit C to DIP motion)

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