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Gibson seeks bankruptcy protection using pre-negotiated plan

After months of negotiations with creditors, Gibson Brands, Inc., the Nashville-based maker of legendary Gibson guitars, has filed a petition under Chapter 11 of the Bankruptcy Code. The filing was accompanied by a plan of reorganization that had already been negotiated with the company's creditors. The plan offers lessons for both large and small companies considering a business bankruptcy.

The plan essentially gives control of the company to a committee of bondholders led by private-equity firm Kohlberg Kravis & Roberts. The company has agreed to sell off its non-core subsidiaries, such as Gibson Innovations, Ltd., located in Hong Kong. According to company executives, the Chapter 11 filing was forced upon the company by a series of debt payments that start coming due this summer. The company's total debt obligation is close to $500 million.

The debt was accumulated in the course of several acquisitions that turned out to be unprofitable. The most notable such acquisition was the 2014 purchase of Gibson Innovations, a division that sold Phillips-branded consumer electronic equipment such as speakers and headphones. The company also lost much of its overseas credit insurance after its creditworthiness was downgraded by credit rating agencies. Gibson also plans to liquidate some of the least successful subsidiaries and sell the rest. The company's main strategy for the future will be a return to its core business of making musical instruments, especially high-end guitars.

Not every business bankruptcy requires the services of KK&R or the restructuring of $500 million in debt. Nevertheless, Gibson's story shows how an unwise acquisition strategy coupled with borrowing that the company could not afford can put pressure on a previously successful enterprise. Any company that finds itself in this situation may wish to consult an experienced bankruptcy attorney for advice on how a Chapter 11 filing can preserve the majority of the company's assets and allow it to return to solvency.

Source: Wall Street Journal, "Guitar-Maker Gibson Brands Files for Bankruptcy," Becky Yerak, May 1, 2018

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