“Tariffs on products from its Mexico and China facilities would increase operating costs by $20 to $25 million.” Fender's credit rating is downgraded as tariffs pose new challenges for the guitar and gear maker

Fender could see operational costs rise by up to $25 million due to new tariffs placed on goods produced overseas.

So says a new report by credit rating analyst Moody’s, which highlights an increased risk of default for the historic gear firm’s operations.

According to the report, Fender Musical Instruments Corporation’s (FMIC) has been hit by three downgrades. The musical instrument maker has had its credit rating downgraded from B2 to B3, indicating a higher risk of default. Moody’s has also downgraded the Probability of Default Rating from B2-PD to B3-PD, and its senior secured term loan rating from B3 to Caa1, indicating significant deterioration in creditworthiness.

Taken together, the three downgrades reflect a negative outlook for a financial forecast that previously looked stable. The changes are a direct result of the rising costs brought on by the Trump administration's newly imposed tariffs, which Moody's predicts could result in operational costs rising by “approximately $20 to $25 million.”

Boutique amp firm Morgan has previously spoken of the financial impact these tariffs could have on its operations.

The tariffs have come into play because of Fender’s overseas production sites, specifically its guitar production site in Ensenada, Mexico, and its China factory, where electronic products, including amplifiers and pedals, are made. Both countries fall under the crosshairs of President Trump’s new tariffs.

Moody's report notes that "a 25% tariff on products from [Fender's] Ensenada, Mexico manufacturing facility and an additional 10% tariff on products manufactured in China and imported into the U.S. would increase operating costs by approximately $20 to $25 million.”

Fender has moved to mitigate these financial pressures by increasing production in Indonesia. While Moody's has recognized that effort, the analyst believes short-term reactions, such as price increases and vendor concessions, may not be enough if the new tariffs remain.

“Prolonged imposition of tariffs,” Moody’s reports, “will likely be highly disruptive and costly for ... Fender.”

Fender's Chinese operations represent their own set of challenges.

Says Moody’s, “China remains the largest global manufacturer of guitars by unit volume, and the musical instruments industry is already facing challenges such as weakening consumer confidence in the US and an economic slowdown in China.”

Operating in a market where “competition is intense” is also challenging because “the ability to pass on costs to consumers is constrained in an already high-priced market.”

The report also notes that Fender possesses “strong brand recognition and market position in the acoustic and electric guitar categories” and “benefits from good geographic diversity and a long-standing reputation for high-quality products, supported by a well-diversified retail distribution network.

“However, these strengths are offset by the company's narrow product focus and earnings volatility, which stem from the discretionary nature of demand for musical instruments,” it continues. “This volatility is further exacerbated by the current challenging economic environment and exposure to new US tariffs.”

A reversal of fortunes, though, can be achieved. Fender would see its credit rating restored if it is able to mitigate the impact of the new tariffs to generate organic growth. Conversely, it could face further downgrades if earnings decline beyond the expected margins.

Those fearing the worst need to only look to its biggest rival, Gibson, to see that it may not necessarily mean the death knell will chime.

Gibson faced similar downgrades in 2018, which led to it filing for bankruptcy, but has since improved its economic outlook under new ownership.

Visit Moody’s to read the full rating report.