Gibson Brands has seen its credit rating downgraded by Moody’s Investors Service, with the poor consumer reception of its 2015 guitar range and high turnover in its senior financial management cited as key reasons for its negative rating.
The company’s credit rating was downgraded from B3 to Caa1 due to its ‘weak operating results pushing credit metrics below Moody's expectations’.
This action concludes a review for downgrade that was initiated on December 22, 2015. The rating outlook is negative.
In addition, Moody’s warned that the negative outlook suggests that Gibson may struggle to meet its near-term financial commitments.
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"The downgrade reflects the weak performance and the resulting very high leverage and also the additional financial obligations Gibson incurred from its agreement with a consumer electronics supplier to settle overdue payables and the stress it puts on company's liquidity profile," said Kevin Cassidy, senior credit officer at Moody's Investors Service.
The report’s ‘Rating Rationale’ read:
‘Gibson's Caa1 Corporate Family Rating considers its weak liquidity profile, soft credit metrics and the highly discretionary nature of its musical instrument and consumer electronics product lines. Demand for these products was dampened by the deterioration in discretionary consumer spending during the last few years and was exasperated by the poor consumer reception of its 2015 guitar models. The ratings also reflect the company's high leverage at around 8.5 times and the risks associated with the consumer electronics business.
‘Another key concern is that there continues to be high turnover in the company's senior financial management level. Gibson's ratings are supported by the company's strong brand recognition in musical instruments and market share for guitar products, and diversified product line within guitars and related music areas.’
Gibson, however, claims that things are already on the up, with the firm’s chairman and CEO, Henry Juszkiewicz suggesting that the business has already experienced an increase in sales, while a new CFO has been drafted in to address the concerns raised over its senior financial management.
According to The Tennessean, Juszkiewicz said: "The company has posted quarterly results for our quarter ending December 2015 that were materially better than they were for the prior year. While we experienced a soft reception to our 2015 products, we have since introduced our improved 2016 product line that is performing extremely well both in sales to retailers and sell through to consumers globally. We feel we are on an upward trend, poised for an excellent year and are confident of the future."
Last year, Moody’s released a market report stating that Gibson’s approach to business was ‘the riskiest’.