Goldman Sachs reportedly launched a $170 million first-lien term loan, a $50 million revolver and a $100 million second-lien loan. The new debt also refinances $51 million outstanding under existing credit facilities. The first lien is rated B1 and the second lien B3.
The ratings are based on high leverage and thin cash flow interest coverage following the leveraged recapitalization. But the company also has a leading brand name, consistent cash flow generation and an ability to successfully integrate acquisitions. "Fender had a slowdown in the business in 2001 and it has rebounded since. But they were still profitable and generated positive cash flow," said Kevin Cassidy, v.p. senior analyst with Moody's Investors Service. "They are the primary supplier to Guitar Center, have a dominant marketshare and more people are buying guitars. Indeed many musicians have numerous guitars, some upwards of 10," he added.
There are challenges specific to this business. The competition from generics is a threat, but a bigger factor is that they have to keep the quality of the product up, Cassidy noted. "The guitars have been used by Hendrix and Clapton. They innovated the Stratocaster and the Telecaster. Fender needs to maintain high quality products in order to continue this strong brand name and enjoy the 'endorsement' of its products by well known musicians," he added.
Moody's expects December 2005 leverage to range between 3.7 to 4 times. Moody's will consider positive ratings actions if the company delevers faster than expected. One measure that could reduce leverage is an initial public offering. Fender has indicated an IPO is likely and it would be possible in the nearer term, said Cassidy, but he could not provide a more specific timeframe.