Dive Brief:

• Credit ratings agency S&P downgraded Guitar Center last week on what analysts saw as a possible debt restructuring that they "would view as tantamount to a default," according to a press release from S&P emailed to Retail Dive.
• The analysts, led by Samantha Stone, noted that the musical instrument retailer’s operating performance has improved, but any gains are unlikely to let the company refinance its capital structure.
• The analysts downgraded Guitar Center’s corporate credit rating from CCC+ to CCC-, writing that the retailer "could likely execute a debt exchange offer within the next six months for its senior secured and unsecured notes." They noted that Guitar Center is currently negotiating with its debt holders about a possible exchange that could be worth less than the face value of the bonds.

Dive Insight:

Guitar Center’s efforts to negotiate a solution to its financial struggles show another path for retailers beyond the glaring headlines of bankruptcy. If the retailer strikes a deal for a debt exchange it could join J. Crew in executing financial maneuvers that stave off Chapter 11, but it's a move that creditors still view as a form of default. (J. Crew’s own debt exchange sparked court fights over details of the plan.)

As The Washington Post pointed out in a June story about the industry, electric guitar sales have dropped off by half a million over the past decade as musical tastes, and with them the methods of making music, shift. When the Post reached out to Guitar Center for the story, a spokeswoman told the newspaper an executive would only speak on the condition that he wouldn’t "discuss financials or politics under any circumstances." The Post turned down the interview opportunity. Other guitar store owners who spoke for the story told the Post their customers were getting older and they were facing online competition.

Moody’s analysts said in April that Guitar Center — the world’s largest guitar retailer, with 260 stores in the U.S. — wasn’t likely to free up enough cash to meaningfully reduce its debt over the next year and a half or so. S&P wrote earlier this year that Guitar Center executives’ turnaround efforts have been "unsuccessful," with same-store sales and profit growth declining as online players cut into its market, according to a report emailed to Retail Dive.

An effort to restructure Guitar Center's debt could ease the company’s burden, but the guitar retailer and Ares Capital, which took over Guitar Center in 2014, would need its lenders on board with a restructuring plan.