Fitch: RadioShack Cost Cutting Likely Not Enough to Prevent Debt Restructuring

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December 12, 2014, 07:51 AM

Filed Under: Retail

Fitch Ratings believes that the massive cost cutting plan outlined today by RadioShack is likely not sufficient to forestall a restructuring of the company's debt in the near term. Fitch currently rates RadioShack Corporation's (RadioShack) Long-term Issuer Default Rating (IDR) 'C'. A full list of ratings is shown below.

RadioShack's liquidity is severely strained, with $43.3 million of cash and $19.3 million of availability on its credit facility at quarter-end (Nov. 1, 2014), for total liquidity of $62.6 million. This compares with liquidity of $183 million at the end of the second quarter and $424 million at the end of the first quarter.

Fitch estimates that RadioShack will have negative free cash flow of up to $80 million during the fourth quarter of 2014, based on EBITDA of negative $40 million - 50 million (improved from negative $97 million a year earlier), interest expense of $20 million and capex of $10 million. Assuming some benefit from working capital during the fourth quarter, currently available liquidity would essentially cover the estimated fourth quarter cash burn.

In Fitch's view, RadioShack does not have material sources of liquidity beyond its revolver as virtually all of its assets have been pledged to its credit facilities. As a result, there continues to be a high likelihood of a bankruptcy filing or other outcome that is detrimental to bondholders.

On Dec. 1, 2014, the company received a notice of default and acceleration from Salus Capital Partners, the agent for the $250 million term loan. The notice of default asserts that the Oct. 3, 2014 recapitalization was a prohibited affiliate transaction that resulted in an impermissible over-advance on the facility, restricted RadioShack's ability to make payments on the term loan, and overstated the borrowing base.

RadioShack disputes these assertions. If it is determined that an event of default has occurred, this will trigger a cross-default in the $585 million ABL facility, and an acceleration of the term loan would be an event of default of the $325 million of senior unsecured notes.

Per Fitch's recovery analysis, Fitch believes that the $585 million senior secured ABL facility is well secured and would receive a full recovery. The $250 million term loan has superior recovery prospects (71-90%), and the $325 million of senior unsecured notes have poor recovery prospects (0-10%).

RadioShack reported continued weak operating results in its third quarter, including a 13.4% drop in comparable store sales focused in the mobility platform, which posted a sharp 24.7% sales decline due to a lack of availability of new handset offerings, as well as a 3.1% decline in the retail platform.

The gross margin rate was up 180 basis points due to the mix shift toward the retail segment, but the expense ratio was up 280 basis points and a due to expense deleveraging. EBITDA was negative $94 million compared with negative $51 million in the third quarter of 2013.

Management outlined a substantial cost cutting program that would result in nearly $300 million of annual savings and expected to be completed by January 2015. These savings would come from store operations, regional management ($100 million), marketing ($105 million), professional fees ($41 million), store and other overhead ($28 million) and corporate ($21 million). These savings represent a sizable 21% of RadioShack's LTM operating expenses of $1.4 billion, and represent a substantial operational restructuring over a very short period of time.

Even if the company is able to achieve these savings, and ignoring any necessary one-time costs, the company would likely still be in a negative EBITDA position absent the completion of significant store closures, which management estimates would yield an additional $90 million of savings, but for which the company has yet to receive lender approval.

Fitch currently rates RadioShack as follows: