By Jonathan Randles

Guitar Center Inc. has been cleared to exit bankruptcy with a plan to cut about $800 million in debt and provide the nation's largest seller of musical instruments with an infusion of cash to navigate the pandemic and holiday shopping season.

Judge Kevin Huennekens of the U.S. Bankruptcy Court in Richmond, Va., said Thursday he would confirm Guitar Center's prepackaged chapter 11 plan, paving the retailer's path to get in and out of bankruptcy in less than a month. Guitar Center, which entered chapter 11 with more than $1.3 billion in debt, anticipates emerging from bankruptcy as soon as next week, a company lawyer said.

Guitar Center's plan is backed by shareholder Ares Management LLC and co-investors Brigade Capital Management LP, one of the company's largest bondholders, and the Carlyle Group. Together they agreed to inject $165 million in equity investment into the Westlake Village, Calif., retailer and will own the business after its emergence from bankruptcy.

"We are ready to close," Dennis Dunne, a lawyer for Guitar Center said during a telephone court hearing. "Every day that we can eliminate from our stay in chapter 11 is a day that reduces risk for the business, employees and its stakeholders."

The restructuring cuts a substantial amount of debt from Guitar Center's balance sheet, much of which is the legacy of a leveraged buyout a decade earlier. Affiliates of Bain Capital LP took the retailer private in 2007 in a $2.1 billion debt-financed deal. Ares took over Guitar Center in 2014 through a debt-for-equity swap that was completed outside of court.

Despite a heavy debt load, Guitar Center said the company remained on sound financial footing until the onset of Covid-19 slammed the retail industry and forced the business to close its stores and furlough about 8,750 of its more than 13,000 employees. The company operates about 300 Guitar Center locations and another 200 stores under its Music & Arts brand, which sells orchestral and band equipment to students, schools and educators.

Although Guitar Center later reopened stores and has hired back most of its staff, the company said when it filed for chapter 11 that the business is susceptible to future closures as a result of increased Covid-19 rates across the country.

By the summer, Guitar Center said it was exploring ways to address its debt and raise new capital to keep the business afloat. The negotiations with lenders, potential investors and other stakeholders over the terms of a balance sheet restructuring resulted in the plan the company came to court with, allowing for its quick trip through bankruptcy.

Under the approved plan, senior secured bondholders owed about $676 million will swap out those claims for $160 million in preferred equity and $450 million in cash, court papers said. Holders of the company's unsecured bonds, owed about $450 million, will get $2 million in junior preferred equity. Other company creditors, vendors and employees weren't impacted by the restructuring.

Guitar Center also secured $725 million in exit financing to fund the business out of chapter 11 and keep its shelves stocked through the holiday shopping season. The funding includes a $375 million asset based facility and the issuance of $350 million in new senior secured notes maturing in 2026.

Guitar Center increased the amount of the notes offering by $15 million during the chapter 11 and got a lower than expected interest rate of 8.5%, a lawyer said during Thursday's hearing.

Guitar Center CEO Ron Japinga said in a statement following the hearing that approval of the plan "represents a momentous and positive milestone in our long-term strategy" and strengthens the company's financial position to continue investing in and growing the business.

"We are nearing the end of a successful holiday season and I am excited about our bright future," Mr. Japinga said.

Write to Jonathan Randles at Jonathan.Randles@wsj.com

(END) Dow Jones Newswires

12-17-20 1628ET