Selected highlights of sector-specific advisory activity happening across North America right now.

Guitar Center holds talks with debtholders for balance sheet deal

Guitar Center has entered into discussions with creditors as it looks to hammer out a consensual deal to remake its balance sheet, according to two sources familiar with the situation.

The borrower elected to miss a 15 October interest payment due on its 9.5% secured notes due 2021, which triggered a 30-day grace period. As such, the company has commenced discussions with debtholders to put together a deal to address earnings pressure and a 2021 maturity wall.

For its part, a group of unsecured holders has retained Debevoise and GLC for assistance, said the first source and a third source. An ad hoc group of Guitar Center’s senior secured noteholders organized with Stroock and Province.

Meanwhile, the company’s roster includes long-time advisors Milbank and Houlihan, sources added.

Guitar Center last month released Q2 2020 earnings in which EBITDA rose, but the pace of costs savings is expected to slow in the second half, as certain expenses will start to show up, such as COVID-19 charges, bonuses and rent deferrals.

The company booked US$61.4 million of adjusted EBITDA in Q2, compared to US$34 million in the comparable period. The figure contained a US$13.9 million adjustment related to deferred rent and lease incentives along with a US$6.1 million addback tied to deferred payroll taxes.

Quarterly revenue eased to US$467 million, versus US$538 million last year. The top line was negatively impacted by fallout from the pandemic, as many locations were forced to close, as reported.

At the end of Q2, the borrower’s liquidity coffers stood at US$68 million of undrawn availability under the revolver alongside US$18 million of cash. Subsequent to quarter-end, the company also provided investors with updated liquidity info, noting that it had US$87 million of revolver availability and US$21 million of cash as of 14 September.

The 9.5% notes moved higher to 87.5 yielding 24.847%, from 83.5 on 14 October and 70 on 21 August, according to MarketAxess.

In May, a group of bondholders provided the company with a capital injection in the form of a US$32.5 million super-priority note. The new capital effectively funded the interest payments due in April and provided the company with a six-month runway, as reported. The size of the issuance is now roughly US$35.75 million.

Leading up to those coupon payments, the company engaged in negotiations with certain bondholders about ways to address the obligation. The payments were due to holders of the issuer’s secured and unsecured notes.

The transaction also called for the borrower’s 13% (5% cash/8% PIK) unsecured notes due 2022 to swap into new unsecured notes at 107.75 cents, and for the cancellation of the 15 April interest payment, according to a Moody’s report dated 21 May. The US$7 million stub 9.725% unsecured notes due April 2020 were exchanged into US$5 million of additional secured notes, the ratings agency noted.

A majority of both classes of bonds agreed to allow the company to place the super-priority note. The company worked with Houlihan on the transaction, as reported.

Houlihan also advised Guitar Center on its out-of-court restructuring in 2018, in which it exchanged unsecured notes into longer-dated paper with the partial PIK coupon and warrants for common stock. At the time, the retailer also refinanced secured notes due 2019 with proceeds of the US$635 million 9.5% senior secured note due 2021.

EG Group auditor Deloitte resigns amid talk of governance concerns

EG Group auditor Deloitte has resigned from its role amid talk of governance concerns, the Financial Times reported yesterday (14 October) citing four unidentified sources with knowledge of the matter.

According to the report, a so-called “private notice” to bondholders on the matter issued by EG Group said that KPMG has been appointed as auditor in place of Deloitte with immediate effect.

The unidentified sources cited in the report attributed Deloitte's abrupt exit to corporate governance concerns and issues linked to internal controls.

As at the July publication of the company's annual report, EG had confirmed the reappointment of Deloitte as auditor. No red flags or concerns were mentioned in last year's audit, the FT report said.

Euro Garages has had success in cushioning its balance sheet against-COVID-19 impacts even as volumes were down at the UK-headquartered petrol station operator.

On 2 October, Euro Garages principals—the Issa Brothers—working with TDR Capital struck a £6.8 billion deal to acquire ASDA from Walmart, as reported.

Bioplan selects advisor for assistance

Bioplan has retained Rothschild as an advisor for help in safeguarding the balance sheet against further deterioration from the pandemic-related economic fallout, according to two sources familiar with the situation.

The Oaktree Capital-sponsored borrower is a provider of beauty and personal care sampling and packaging. Even before the onset of the pandemic, the company’s earnings were dragged lower by the secular pressure facing the retail sector. COVID-19 only served to exacerbate its problems, given the prolonged closures of retail locations.

For its part, an ad hoc group of Bioplan lenders has been working with Davis Polk as legal counsel in anticipation of balance-sheet talks, as reported. On the advisor front, PJ Solomon has been tapped to become financial advisor to the group, after first doing work to represent a large lender.

The company’s US$145 million Libor+800bps covenant lite second lien TL due September 2022 is quoted 44.667/48, up from 41.6/45.6 in late June, according to Markit. The US$375 million L+475bps first lien TL due September 2021 is quoted 58.625/60.625, up from 57.5/59.7 on 26 August.

In July, Standard & Poor’s lowered its ratings to CCC from CCC+, citing weak cash flow and liquidity concerns.

That downgrade came on the heels of Moody’s cutting the ratings to Caa2 from B3, noting high leverage, projections for negative cash flow in 2020 and EBITDA shortfalls.

As such, management has indicated that the company will commence discussions with lenders, as reported.

Horizon Hobby taps Baird to advise on sale, sources say

Horizon Hobby, the private equity-backed developer of remote-controlled toys, has tapped Baird to advise on a potential sale, three sources familiar with the situation said. The company has around US$60 million in EBITDA, two of the sources said.

The process recently launched with marketing materials being sent to suitors, the same two sources added. The Champaign, Illinois-based Horizon Hobby is planning to collect first round bids soon, they said.

The business doesn’t have a lot of good close comps, the sources said. Horizon Hobby could fetch a potential valuation in the high single digits or low double digits range as a multiple of EBITDA, one of the sources said.

Horizon Hobby was acquired by Armory Capital and Mill City Capital in 2014. Terms of the deal were not disclosed. Armory, like Horizon Hobby, is also based in Champaign, while Mill City Capital is based in Minneapolis, Minnesota.

Hobbico, another Illinois-based manufacturer and distributor of hobby products, sold its hobby division to Horizon Hobby for US$18.8 million amidst bankruptcy proceedings in 2018. Hobbico filed for Chapter 11 bankruptcy protection that year and later converted to a Chapter 7 after asset sales.

In August this year, Horizon Hobby also bought Pro-Line Racing, a manufacturer of parts and accessories for remote control cars.

Horizon Hobby develops, markets and distributes radio-controlled hobby products including trains, cars, airplanes and other products. It was founded in 1985 and has additional operations in California, the UK, Germany and China.

Corner Bakery taps real estate advisor to aid in ongoing workout

Corner Bakery Café has hired B Riley Real Estate Solutions to advise on negotiations with its landlords amidst an earnings downturn, according to four sources familiar with the situation. 

The company is currently exploring all restructuring options, including a distressed sale under article 363 of the bankruptcy code as well as an out-of-court deal, three of the sources said. 

Corner Bakery has roughly US$100 million outstanding on its Goldman Sachs-led credit facility, two of those sources noted. 

The fast-casual bakery operator and franchisor booked US$18 million in LTM EBITDA and US$350 million in LTM revenue through February 2020, as reported. But earnings have plummeted as social distancing measures during the COVID-19 pandemic have slammed its breakfast and lunch sales, as well as its workplace catering business. 

Corner Bakery has been trying to find a buyer while working with DLA Piper as restructuring counsel, Stifel as financial advisor and Mackinac Partners as chief restructuring officer. 

Roark Capital purchased Corner Bakery as part of its acquisition of Il Fornaio Corp in 2011. The sponsor then offloaded the Il Fornaio Italian fine dining segment of the business to Create Restaurants for US$74 million in 2019, using part of the proceeds to pay down debt, also as reported. 

Before the pandemic-driven slide, the bakery chain posted US$342.6 million in sales across 173 stores in 2019, versus US$362 million in sales at 182 stores in 2018, according to restaurant research firm Technomic. 

It currently has company-owned and franchised locations in 21 states and Washington DC, according to its website.