In a highly anticipated move, the parent company of Gibson Guitars, Epiphone, and Dobro filed for Chapter 11 bankruptcy protection in Delaware, May 1.
The bankruptcy filing does not mean the end of the celebrated guitar maker. A Chapter 11 bankruptcy, like the one filed by Gibson Brands, Inc., is a way for the company to not die. Instead, the Nashville-based company will be protected under US bankruptcy law and managed as it is reorganized and continues to do business under a new ownership agreement.
This form of bankruptcy has been used by such well-known brands as GM and Chrysler, and often means that a company is profitable but unable to make the interest payments on the debt is has accumulated.
The filings indicate that Gibson, which has been run by Gibson CEO Henry Juszkiewicz since 1986, owes upwards of $500 million to lenders and suppliers, and this new pact permits the company to borrow up to $135 million to remain in business. The restructuring agreement shows that several senior lenders to Gibson, including Melody Capital Partners, Silver Point Capital, and funds associated with KKR Credit Advisors, will exchange debt for equity ownership in a reorganized company.
Gibson Guitars formed a larger parent company in 2013, Gibson Brands Inc., when it began investing heavily in consumer and pro audio brands as the company attempted to move toward a broader home-audio–based lifestyle brand. The documents filed show that the company plans to ramp down the consumer electronics business to re-focus its attention on the guitar-making and audio businesses. Gibson Brands’ holdings include Onkyo, TEAC, and Phillips, among several others. On April 30, Gibson filed plans to liquidate the Hong Kong-based Phillips consumer electronics firm, which it acquired in 2014, in Hong Kong, the US, and six European countries.
“The decision to re-focus on our core business, musical instruments, combined with the significant support from our noteholders, we believe will assure the company’s long-term stability and financial health,” Juszkiewicz said in prepared remarks. “Importantly, this process will be virtually invisible to customers.”
According to the agreement, Juszkiewicz will remain with Gibson as it emerges from bankruptcy, “to facilitate a smooth transition” during a one-year consulting deal, with a compensation package. Bloomberg reports that the company didn’t immediately respond to questions about whether Juszkiewicz will remain as CEO or in a separate role, though the group had previously declined to invest while Juszkiewicz remained in charge.