Fitch Affirms RadioShack's IDR at 'CCC'; Rates New Credit Facilities
CHICAGO -- December 23, 2013
Fitch Ratings has affirmed its 'CCC' Long-term Issuer Default Rating (IDR) on
RadioShack Corporation (RadioShack). Fitch has also assigned ratings to the
company's new credit facilities. A full list of rating actions follows at the
end of this release.
Key Rating Drivers:
The IDR reflects the significant decline in RadioShack's profitability and
cash flow, which has become progressively more pronounced over the past two
years. Weak results have been due in particular to the gross margin pressure
in the company's mobility segment (around 50% of sales), and have led to a
marked deterioration in the company's credit profile. There is a lack of
stability in the business and no apparent catalyst to stabilize or improve
EBITDA was negative $69 million in the 12 months ended Sept. 30, 2013, and
Fitch estimates it will be in the negative $80 million-$100 million range in
2013, with no improvement expected in 2014/2015. Fitch expects capex to run at
$50 million annually, while interest expense is expected to be around $50
million in 2013 and closer to $55 million in 2014/2015. Free cash flow (FCF)
is expected to be in the negative $100 million range for 2013, assuming some
benefit to working capital from planned inventory reductions this year.
Fitch expects RadioShack to end 2013 with about $250 million-$300 million in
cash and full availability on its $535 million revolving credit facility.
Beyond 2013, FCF could track at negative $175 million to $200 million
annually, and RadioShack will have to fund its fourth-quarter seasonal working
capital swing estimated at $150 million-$250 million. This will drain the
company's liquidity position materially over the next 24 months.
New Credit Facilities:
On Dec. 10, 2013, RadioShack entered into new five-year credit facilities,
composed of a $585 million senior secured asset-based lending (ABL) credit
facility, and a $250 million secured term loan. This represents an incremental
$200 million of gross liquidity (before significant upfront financing costs),
including an $85 million increase in the size of the revolver and $125 million
of additional term loans. There are no financial maintenance covenants in
either of the new facilities.
The ABL credit facility includes a $535 million revolver at a borrowing rate
of LIBOR plus 2.0%-2.5%, and a $50 million first-in-last-out term loan at
LIBOR plus 4%. The facility is secured by a first lien on current assets and a
second lien on fixed assets, intellectual property and stock of subsidiaries.
The $250 million term loan is secured by a first lien on fixed assets,
intellectual property and stock of subsidiaries, and a second lien on current
assets, and is at a borrowing rate of LIBOR plus 11%.
The ratings on the various securities reflect Fitch's recovery analysis, which
is based on a liquidation value of RadioShack in a distressed scenario of $576
million as of Sept. 30, 2013. Most of the value comes from inventories, of
which half are assumed to be mobile phones which are assigned a liquidation
value of 85%, and the balance are other inventories at a liquidation value of
50%. Fitch uses a liquidation value of 30% for receivables to reflect the
netting out of estimated payables to the wireless carriers.
The ABL facility, including both the $535 million revolver and a $50 million
term loan, has outstanding recovery prospects (91%-100%), and a rating of
'B/RR1'. The $250 million term loan is rated two notches below the asset-based
facility, at 'CCC+/RR3', implying good recovery prospects of 51%-70%. The $325
million of senior unsecured notes due in May 2019 are rated 'CC/RR6',
reflecting poor recovery prospects (0%-10%).
Stabilization in the business leading to a sustainable recovery in operating
trends and financial flexibility could lead to an upgrade. EBITDA would have
to reach at least a cash flow breakeven level of $100 million (capex of $50
million and interest expense of at least $50 million), which is not expected
in the near- to intermediate-term.
Continued deterioration in EBITDA that further constrains cash flow and
liquidity, and impedes the company's day-to-day operations would lead to a
Fitch has taken the following rating actions:
--Long-term IDR affirmed at 'CCC'
--$535 million senior secured ABL revolver rated 'B/RR1';
--$50 million senior secured ABL term loan rated 'B/RR1'
--$250 million secured term loan rated 'CCC+/RR3'
--Senior unsecured notes affirmed at 'CC/RR6'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers'
(Nov. 20, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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ON THE FITCH WEBSITE.
Philip M. Zahn, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Monica Aggarwal, CFA
Brian Bertsch, New York, +1 212-908-0549
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