Feb. 10 (Bloomberg) -- Muzak Holdings LLC, the company that made “elevator music” famous, sought bankruptcy protection from creditors as its debt matured and restructuring alternatives fell through due to the economic crisis.

The company, based in Fort Mill, South Carolina, listed debt of $465.3 million and assets of $324.2 million in Chapter 11 documents filed today in U.S. Bankruptcy Court in Wilmington, Delaware. Fourteen affiliates also filed for court protection.

Muzak is “overleveraged,” with virtually all of its debt “set to mature in the first quarter of 2009,” Chief Financial Officer R. Dodd Haynes said in court documents. Over the past two years the company has tried to address its debt load through a merger or sale. Those efforts “evaporated in the face of difficult economic conditions” and the company was left with bankruptcy as its only recourse, Haynes said.

The company said it won’t seek additional financing and has an agreement with its lenders to use cash that represents collateral for its loans to fund operations while in bankruptcy, according to court documents.

Weathering the Storm

“From an operational standpoint,” these cases are “largely unnecessary,” Haynes said. “While no business or individual is free from the wrath of the global economic crisis,” Muzak was able to “weather the storm” and continued to generate positive cash flows, he said. Muzak had revenue of $249.1 million in 2008 and $250.2 million in 2007, court papers show.

Closely held Muzak supplies more than 2 million songs and music to retailers to help set the mood in their stores, in hopes of influencing shoppers to become buyers. Muzak was founded in the 1930s by U.S. Army General George Squier, who adapted military messaging technology to pipe music into elevators to drown out the noise they produced, according to its Web site.

Muzak later began marketing to employers, citing research showing that background music could increase employee productivity. By the early 1970s, Muzak was selling its original recordings of songs, performed without lyrics, to retailers.

Today, Muzak delivers music from more than 80 genres via satellite or by producing custom mixes. Customers have included McDonald’s Corp., Ann Taylor Stores Corp. and AT&T Inc., Muzak said on its Web site.

Bond Debt

Muzak’s $220 million of 10 percent callable bonds due in 2009 traded at 75 cents on the dollar today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities traded at about 91 cents on Jan. 8, according to Trace data.

The 30 largest consolidated creditors without collateral backing their claims are owed a total of $375 million, court papers show. U.S. Bank NA is the largest unsecured creditor as indenture trustee for Muzak’s 10 percent callable bonds due in 2009, 9.875 percent callable bonds due in 2009 and 13 percent callable bonds due in 2010. The total due under the bonds is $371.3 million, according to court papers.

The bankruptcy petition was filed by Domenic E. Pacitti, a partner at Klehr Harrison Harvey Branzburg & Ellers LLP in Wilmington.

The case is In re Muzak Holdings LLC, 09-10422, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Michael Bathon in Wilmington, Delaware, at mbathon@bloomberg.net; Dawn McCarty in Wilmington, Delaware, at dmccarty@bloomberg.net.

Last Updated: February 10, 2009 19:55 EST