Long-Term Debt

9 Months Ended

Sep. 30, 2012

Long-Term Debt

Long-Term Debt

4.Long-Term Debt

Long-term debt consisted of the following (in thousands): 

	September 30,		December 31,
	2012		2011
Guitar Center
Senior secured asset-based revolving facility	$	—	$	—
Senior secured term loan	621,762		621,762
Obligations under capital lease, payable in monthly installments through 2013	216		700
Senior unsecured notes	375,000		375,000
	996,978		997,462
Less current portion	4,478		646
Guitar Center long-term debt, net of current portion	992,500		996,816
Holdings
Senior unsecured PIK notes	564,673		564,673
Less current portion	129,784		—
Holdings long-term debt, net of current portion	434,889		564,673
Holdings consolidated long-term debt, net of current portion	$	1,427,389	$	1,561,489

Guitar Center long-term debt as of September 30, 2012 consisted of (1) a senior secured asset-based revolving facility, referred to as the asset-based facility, with a maximum availability of $373 million and no amounts drawn, (2) a senior secured term loan facility, referred to as the term loan, with an initial aggregate principal amount of $650 million, (3) a senior unsecured loan facility, referred to as the senior notes, with an aggregate principal amount of $375 million.

Holdings long-term debt as of September 30, 2012 consisted of a senior subordinated unsecured payment-in-kind loan facility, referred to as the senior PIK notes, with an initial aggregate principal amount of $375 million.

Extended commitments on the asset-based facility

During the first quarter of 2012, we obtained a total of $55 million in commitments under the extended terms of the asset-based facility to substitute commitments that were not extended in March 2011. We paid an aggregate of $0.7 million in arrangement, consent and extension fees as part of the transactions.  These commitments extended the maturity date from October 2013 to February 2016 and increased the pricing margin on drawn and undrawn amounts. We can borrow under the asset-based facility at either the (a) London Inter-Bank Offered Rate, or LIBOR, plus a margin based on average borrowings that ranges from 2.75% to 3.25% on extended commitments and from 1.25% to 1.75% on non-extended commitments or (b) prime rate, plus a margin based on average borrowings that ranges from 1.75% to 2.25% on extended commitments and from 0% to 0.5% on non-extended commitments. We are required to pay a commitment fee to the lenders based on undrawn availability at a rate of 0.5% per annum for extended commitments and 0.25% per annum for non-extended commitments.

Fees paid were capitalized and are amortized into interest expense using the effective interest method.

Senior PIK notes interest reinvestment elections

For interest payments due between April 2011 and October 2012 on the senior PIK notes, we had the option to pay 50% of the interest due by issuing additional Guitar Center senior notes. For periods after October 2012, interest on the senior PIK notes is payable only in cash.

We did not elect to reinvest any part of the April 2011 or October 2011 interest payments on the senior PIK notes.

In the fourth quarter of 2011 we elected to reinvest 50% of the interest payment due in April 2012. However, we were given the option to re-evaluate the election during the first quarter of 2012 and subsequently elected to make the entire interest payment in cash.

We elected to cause the holders of our senior PIK notes to reinvest 50% of the October 2012 interest payment on the senior PIK notes in additional senior notes of a like amount.

Guarantees, dividend restrictions and covenants

Guitar Center’s term loan, asset-based facility and senior notes are guaranteed by substantially all of its subsidiaries. The subsidiary guarantors are 100% owned, all of the guarantees are full and unconditional and joint and several and Guitar Center, Inc. has no assets or operations independent from its subsidiaries within the meaning of Regulation S-X, Rule 3-10. Any non-guarantor subsidiaries are minor.

For information about dividend restrictions among Holdings, Guitar Center and its guarantor subsidiaries, see Note 5 to the audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 27, 2012.

As of September 30, 2012, we were in compliance with all of our debt covenants.

Future maturities

Future maturities and expected payments of long-term debt as of September 30, 2012 were as follows (in thousands):

	Guitar Center		Holdings		Holdings Consolidated
Remainder of 2012	$	162	$	—	$	162
2013 (1)	5,941		129,784		135,725
2014	14,314		—		14,314
2015	6,500		—		6,500
2016	6,500		—		6,500
2017	963,561		—		963,561
Thereafter	—		434,889		434,889
	$	996,978	$	564,673	$	1,561,651

(1)We anticipate making a one-time principal payment on the senior PIK notes in April 2013. We estimate this payment will be $129.8 million, which is the amount of previously capitalized PIK interest required to be paid to prevent the senior PIK notes from being treated as “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Internal Revenue Code. This amount is included in current portion of long-term debt in Holdings’ condensed consolidated balance sheet as of September 30, 2012. The remaining unpaid balance of the senior PIK notes will mature in April 2018.

Deferred financing fees

Amortization of deferred financing fees included in interest expense was as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Holdings	$	802	$	742	$	2,388	$	2,154
Guitar Center	699		639		2,079		1,846

Unamortized deferred financing fees included in other assets in our condensed consolidated balance sheets were as follows (in thousands):

	September 30, 2012		December 31, 2011
Holdings	$	13,877	$	15,524
Guitar Center	11,576		12,913