Gibson Guitar & Bankruptcy: Something to ‘fret’ About?

Gibson Guitar Faces Imminent Bankruptcy After 116 Years In Business

Gibson Les Paul Traditional T-2016 Wine Red

Numerous reports circulating in the past several days point to ominous signs for the future of iconic guitar maker The Gibson Guitar Company(known since 2013 by its current corporate name, Gibson Brands, Inc.). Many of the recent reports center on the company’s bond and loan debt that carry significant payments that are imminently due in 2018.

The Nashville, TN companywas founded by Orville Gibson toward the end of the 19th century. Initially, Orville Gibson built and sold single-piece mandolins – on which he held a patent granted in 1898 – from a one-room workshop in Kalamazoo, MI. His patented mandolins were more durable than others manufactured at the time and werealso capable of being manufactured in volume.

Until Orville Gibson’s death in 1918, the company manufactured and sold only the original patented mandolins. In 1919, the product line was expanded to include the original “archtop guitar”. The F-5 Gibson mandolin was introduced in 1992, preceded by electric instruments such as the ES-150 “Electric Spanish” model (1936) and other electrified instruments that included banjos, steel guitars, and mandolins.

Today, in addition to instruments made under the Gibson logo, the company also owns and manufactures instruments under other brands such as: Epiphone; Kramer; Maestro; Steinberger; and, Tobias. Gibson Brands also owns such companies as Kalamazoo; Dobro; Valley Arts; Slingerland; and, Baldwin (Baldwin, in turn, is the parent of Chickering; Hamilton; and, Wurlitzer).
The Gibson Mandolin-Guitar Manufacturing Company, Ltd. was incorporated in 1902.

Over the years, ownership of Gibson has changed several times. The company was purchased by Chicago Musical Instruments (CMI) in 1944. In 1969, CMI sold its holdings to a South American company, Ecuadorian Company Limited (E.C.L.) – later the Norlin Corporation. Today, Gibson is a privately held corporation under the ownership of Chief Executive Officer Henry Juszkiewicz and President David Berryman who acquired their interests in 1986 from E.C.L.

Rumors of financial difficulties have been circulating for some time. Last year, the company stopped further development of its “Cakewalk” music software and sold its Memphis, TN factory. Additionally, Gibson recently gave up its Nashville, TN warehouse which it had occupied for more than thirty years.These moves signaled to industry analysts that something ominous might have been afoot.In a recent report, one analyst said, “Over the years, Gibson has expanded into products and categories that haven’t performed well. Their debt has mounted and they may be running out of time – rapidly.”

Gibson Brands’ revenues exceed $1 billion annually. The company’s debt has proven to be so burdensome in recent years that such revenues – along with the expansiveness of its family of brands and associated businesses – are not sufficient to service the debt.

The company’s most crucial immediate problem that may be signaling bankruptcy focus on looming debt payments that are due in late July of this year – a debt payment on $375 million in senior secured notes comes due on July 23, 2018. Failure to make that payment, which at present seems likely, automatically triggers the requirement for Gibson to pay an additional $145 million.
The Nashville Post said in a recent report on the company, “Commentators noted the chances of refinancing in time (to avoid falling into bankruptcy) look ‘slim’…”. Bond holders have become increasingly uneasy in recent months due to the company’s seeming inability to service its debt and, according to some, their perception of “a lack of clarity” with regard to the company’s future. In 2017, Gibson obtained an emergency $130 million loan from GPS Capital Partners. That move proved to be a source of additional concern for the company’s creditors.

Financial analysts are pointing out that the recent departure of Gibson’s Chief Financial Officer, Bill Lawrence, after less than a year on the job, was a sign that all was not well with the company. Lawrence’s departure came just six months before the bond debt of $375 million was coming due and while the company was struggling to find a sufficient solution, temporary or long term– such as restructuring debt or filing for some form of bankruptcy relief – to forestall further problems and keep the company afloat.

In a move that surprised some industry observers, Gibson Brands announced on Friday, February 16, 2018, that it had hired Benson Woo as Chief Financial Officer to replace the departed CFO Bill Lawrence. Woo is a company rehire, having previously served as CFO for several months in 2016. Woo, holder of an MBA from Harvard and an undergraduate degree from M.I.T., started his career in finance at General Motors before moving on to a succession of jobs in several companies that were more entrepreneurial in nature. Statements on the appointment of Woo by Gibson Brands’ CEO and others were tepid at best.

As the prospect of bankruptcy looms, informed sources report that, “Chairman and Chief Executive Officer Henry Juszkiewicz is thought to be in a race against time to decide whether to exchange the company’s debt, look to try and pay it off using his equity, or try to declare the company bankrupt.” Gibson, within the past two months, hired the large global investment bankJeffries to help with the current seemingly dire financial situation while Juszkiewicz and his associates continued to seek alternatives to bankruptcy and the possible loss of his company.
Company officials remain somewhat optimistic in the face of the prospect of bankruptcy. In a statement issued earlier this week, CEO Juszkiewict said that the company “… has met all current obligations to the bondholders”. He went to say that Gibson “…is working with an investment bank (Jeffries) to find an alternative credit facility.” In an additional statement issued by the company, officials said, “…we are confident that all bonds can be refinanced in the ordinary course of business.”

The core business of Gibson Brands (including subsidiary companies such as Philips) is the manufacture and sale of professional audio equipment and a wide range of musical instruments under a number of brands. Juszkiewicz’s recent statements throw shade on his self-professed optimism when he admits that “…both regions (i.e. Gibson brands and subsidiary companies) are profitable but are performing below the level of success we saw several years ago.” (emphasis added)

When a Nashville-based financial reporter asked this week about the financial difficulties facing his business and what alternatives may be available to him, Henry Juszkiewicz responded, “We have been monetizing assets like stock holdings, real property, and business segments that could not achieve the level of success we expected. By monetizing these assets, we can reduce debt and generate funds to contribute to business segments that are thriving.” The statements of Juszkiewicz did not make mention of what business segments of the parent company might be trimmed or scaled back; likewise, the CEO did not, at any point, mention bankruptcy as a possible alternative despite wide-ranging speculation on all fronts that bankruptcy may be “just around the corner”.
Remaining optimistic, Juszkiewicz concluded his statement, saying: “With the refinancing and improvement in operating performance from the actions that we are rolling out, we expect the company to be organized for success and growth for years to come.”

Despite such optimism the prospects of CEO Juszkiewicz may not be too bright, especially if the company fails to make timely payment on the senior secured notes in question. A senior credit officer at Moody’s Investor Services opined earlier this week, “Failure to repay could even result in the departure of CEO Henry Juszkiewicz. If this ends in bankruptcy, he will give up the entire company.” For someone who has invested thirty years of his life in an iconic company like Gibson Brands, Inc., such a fate would be seen as disastrous.
In related developments, is reporting that “(Gibson Brands) looks to be changing direction; this year Gibson Brands attended the Consumer Electronics Show rather than the more customary NAMM Convention in order to focus on its Philips audio brand – the ambitious group also plays host to audio companies TEAC, Tascam and Onkyo.”
This week, Gibson Brands is coming up on its third-quarter shareholders’ meeting where it will report the company’s fiscal third quarter figures (and related financial woes and prospects). The Nashville Post said, “Bond owners will be watching for an improvement in the company’s electronics business, which has been built up in the past few years via debt acquisitions but has seen sales slump of late. Still, even a solid turnaround on that front won’t be enough for Juszkiewicz to avoid difficult conversations.” (emphasis added) According to all of the recent reports surrounding Gibson’s finances and difficulties, such “difficult conversations” may likely include conversations centering on bankruptcy.

The company’s creditors remain pessimistic and concerned despite the recent optimistic and forward-looking statements by the company and its CEO. An online article by Paul Resinkoff, dated February 21, 2018, – titled, “Gibson Guitar Has 150 Days Until Bankruptcy – and a Brewing Internal War” – is illustrative of such pessimism and concern.
Resinkoff begins: “As the financial situation surrounding Gibson Guitar deteriorates, activist creditors are now taking matters into their own hands. The results could be the heads of Chairman and CEO Henry Juszkiewicz and top executives like CFO Benson Woo…” To drive home the point of many pundits and observers, Resinkoff emphasized that “multiple analysts and investors” consider the risk of a Gibson default to be very high, “…with bankruptcy a likely outcome.”

Gibson pushed back on speculation of an “internal war” as noted by Resinkoff. Bloomberg, however, reported earlier in the week that the secured debt holders are in no mood for “push backs” or excuses. According to the Bloomberg report, concerned and angry investors are strongly pushing for “new leadership” (i.e. the ouster of Juszkiewicz and other top executives) and threatening to drive the company into bankruptcy.

The so-called “activist investors” might be angling for a takeover of the company, something that Juszkiewicz recently alluded to as “suspect intentions”. According to Bloomberg, the investor group of activists holds over two-thirds of the bonds that are soon due for repayment. Resinkoff calls the bondholder clout “serious leverage” and opines that is may be sufficient to force the CEO to make serious, long-term changes that may include his own ouster.

All outside reports say that the disgruntled and concerned investors are pessimistic and skeptical that meaningful changes can occur in time to avoid bankruptcy or some other major change for the company. While Juszkiewicz remains hopeful of securing nearly $400 million in new loans to pay off the bonds, his adversary investors “…don’t expect earnings to be strong enough to attract new money for a refinancing…:”. One reason to doubt that new creditors will come forward is the continuing presence and involvement of company CEO Henry Juszkiewicz.
The Resinkoff report stated that a July 23, 2018, “full-blown default” would “trigger a separate, ‘springing lien’ in the amount of $185 million.” Such lien figure has been previously reported to be $145 million, $40 million less that the current reported figure (which may be a typo in the report instead of the correct amount of the “springing lien”).

Gibson’s financial difficulties are not as new as they may seem to be. Reports of such difficulty go as far back as August, 2017, when Moody’s Investor Services, Inc. downgraded Gibson Brand’s corporate family rating and raised its probability of default. Moody’s cited “weak operating performance. ‘liquidity pressure’ from approaching (bond) maturities, and an ‘unsustainable’ capital structure.” The downgrade was to a “Caa3” rating which one Wall Street commentator said, “falls nine notches into junk territory.” Reports show that Gibson’s debt-to-earnings ratio is approximately 10x which many consider to be an ominous indication. Several years ago, Moody’s did a similar downgrade for reasons that are not clear (or of consequence) today.
Financial straits might not be the only reason – or reasons – why Gibson Brands, Inc. is in trouble today and possibility facing bankruptcy.

Often times, what seems clear on the surface (i.e. Gibson Brands financial troubles being attributed to under performing divisions, heavy debt that they are unable to cover from company revenues and assets, and a horrible debt-to-income ratio) may be something entirely different under the surface. Poor management and even worse management decisions may be somewhat at fault as well. A toxic corporate culture and a CEO who is not worker friendly and is known to have an explosive temper and incredibly “short fuse”, and related issues may be other reasons why Gibson Brands, Inc. is facing imminent bankruptcy or a similar fate.

Not long ago – in June, 2015 – an online article appeared on the website Titled, “Gibson Guitar is a Remarkably Unpopular Company”, and penned by Hamilton Nolan, a writer @Gawker Media, the article fairly slams Gibson, its CEO, and the quality of their products and product lines.
The lengthy piece is instructive and well worth consideration as another possible reason why Gibson may be headed for bankruptcy or other corporate realignment.
The article begins – without mention of Gibson’s current financial difficulties – as follows: “The iconic guitar company Gibson faces seemingly endless troubles, which include an easily enraged micromanaging CEO and a product line perceived as shoddy and overpriced. Based on what we’ve heard lately, it is not a great employer or maker of guitars”. (emphasis added)
Much of what is stated in the piece is based upon input from Gibson employees, former employees, and customers. Nolan, after hearing a “trickle of rumors about mismanagement at Gibson…”, sought comments and contributions from people he thought might have some knowledge of Gibson’s corporate culture, management, and the like. He found that, on balance, Gibson faced two “main problems”:

  • Problem 1: Company employees, by and large, hate the company, in general, and CEO Henry Juszkiewicz, in particular
  • Problem 2: Gibson customers “think they’recrap” (referring to Gibson products)

The following excerpt from Nolan’s article, though lengthy, is worth the read. The story is told by a prospective new hire who had traveled from the UK to Nashville to interview for a social media manager position with Gibson…

“I just got a glimpse of what felt like the world’s most baffling hiring process. ‘The psychometric test takes approximately 3 hours to complete…’ (she was informed by email). (She responded): ‘I don’t have time for a 3-hour test… Also, please can I have a job description because you haven’t actually sent me anything about the role, and I’d really rather know exactly what you expect before I succumb to being tested for THREE WHOLE HOURS’ (to which she told Nolan in an aside – ‘I wasn’t quite so stroppy…’). ‘Anyway…HR invited me to meet with three different people… in one day… I hadn’t planned to spend the majority of a day in a corporate cellblock…’ (She continued): “I’ll admit I forgot about the test when the CEO stepped into the gigantic conference room, if only because he was even more baffling. It was all I could do to sustain eye contact. The silver-haired, 70’ish man looked as though he was having some sort of epileptic fit in front of me as he blathered on and on about his history in and before he started with Gibson. His eyes were rolling around the room, landing everywhere but on me. I wasn’t entirely sure he was sober.’

Woman: ‘So, do you have a social media strategy already?’
CEO: ‘Oh yes’
Woman: ‘I’d like to know what it is
CEO: ‘I bet you would’…”

And… so it went with Henry Juszkiewicz…

The woman concluded: “As he spoke, the words I read on rushed back to me: “Run, don’t walk away from even considering working here. The CEO is HORRIBLE – mean, nasty, uber-controlling. If anyone in the company dares to have a different idea than his, you can pretty much guarantee that they will be fired – on the spot.”
The woman in question? She did not take the job…
Another respondent who had experienced the hiring process at Gibson Brands, offered this:

“I saw your… post on Gibson and laughed my ass off. I worked for Henry in 2012 and shared much the same experiences that others detailed. I lasted about 9 months before I had to bail and that was longer than about 20 other guys that year. After you join, co-workers admit that ‘you are the class of 2012/2013/2014…etc.,’ and that you are basically toast. Great way to treat people. Move them and their family to Nashville and then trash them. I found a way to stay in Nashville… However, I would never want to relive the sequence of events I lived through.”

Customers (more than likely, former customers today) had similar highly negative comments when it came to rating Gibson’s products. Many complained that the products were “shoddy”, too expensive, and “outdated”. One said, after stating his complaints about quality, price, and “horrible quality control”, “…I would never support them because the CEO is a total jackass… It’s sad that a once iconic brand is run by such a terrible CEO. He is ruining the company.”

So, today it remains to be seen whether or not Gibson Brands, Inc. will follow in the recent footsteps of other corporate icons (Toy’s ‘R Us, comes to mind) and fall into Chapter 11 bankruptcy. If recent reports are to be given adequate credence, bankruptcy is one of the more likely outcomes especially since angry secured creditors are tired of speculation and want answers to their central questions: “can Gibson meet its short-term debt obligations?”, and, “what does the long-term future of the company look like if it does?” The answers may come sooner than company executives are fearing – sometime on or around July 23rd or in the weeks to follow.

Say, that Gibson pulls off a miracle (like obtaining over $400 million in new loans – in near-record time – to pay off the outstanding bonds totaling $375 million), what then? Will Henry Juszkiewicz remain in charge? Will under performing brands and divisions be scrapped so that a healthier company goes forward? Or, will a horrible corporate culture with the notorious Juszkiewicz at the helm be enough to sink Gibson over the long haul, financial woes and bankruptcy notwithstanding?
Most speculators would bet on the bankruptcy route and a Chapter 11 reorganization plan that might include the ouster of the current CEO (and others, such as CFO Benson Woo) and the sale of the once iconic music industry giant.

Whatever happens, stay tuned… probable answers should not be long in coming.

Photo credit: Gibson Brands, Inc.