RadioShack Loans Not Enough for Turnaround, CreditSights Says

RadioShack Corp.’s new financing falls short of what the unprofitable electronics retailer needs to turn itself around after a “sharp decline” in third-quarter performance, according to debt research firm CreditSights.

“This will serve to further subordinate the unsecured interests, while still not providing for a sufficiently large liquidity injection for the company to effectuate its planned turnaround strategy,” James Goldstein, an analyst at CreditSights, wrote in a research report today.

RadioShack received commitments for a $585 million asset-based revolving credit line and a $250 million secured term loan to refinance existing bank debt and provide it with $175 million in additional liquidity. The Fort Worth, Texas-based company expects to close the new secured debt financing during the fourth quarter, it said in a statement yesterday announcing its earnings for the three months through Sept. 30.

The retailer is reducing slow-selling and duplicate merchandise while Chief Executive Officer Joe Magnacca revamps stores to give them a cleaner look. That wasn’t enough to keep same-store sales from dropping 8.4 percent as the company posted its seventh-straight quarterly loss. The additional liquidity is a “risk” to recovery for the existing holders of the unsecured bonds should the company fail to turn around the business, CreditSights said.

RadioShack’s 6.75 percent senior unsecured bonds due in 2019 plunged yesterday to 67.5 cents on the dollar to yield 15.7 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The more than seven cent drop from 74.6 cents on the dollar on Oct. 21 took the bonds to lowest level since trading at 63.9 cents in January, the data show. CreditSights maintained its “underperform” recommendation on RadioShack’s bonds.

Recovery ‘Risk’

Maggie Thill, a RadioShack spokeswoman who works for Weber Shandwick, didn’t immediately provide comment on the company’s new financing.

“There is simply too much uncertainty in the earnings and cash flow prospects over the next several years to warrant exposure to the name via a 2019 maturity,” Goldstein wrote in today’s note.

RadioShack’s earnings before interest, taxes, depreciation and amortization “plummeted deeply into negative territory” in the third quarter, CreditSights said. The company had a $98.4 million loss before interest, taxes, depreciation and amortization costs are deducted, according to data compiled by Bloomberg.

The retailer’s net loss widened to $112.4 million, or $1.11 a share, from $47.1 million, or 47 cents, a year earlier, the company said in yesterday’s statement. RadioShack ended the third quarter with total liquidity of $613 million, according to the statement.

Technology Playground

The company’s turnaround strategy involves making the retailer “a neighborhood technology playground.” Prototype stores have a cleaner look compared with the tangled collection of cables, cords, adapters and batteries that many customers associate with RadioShack.

RadioShack’s shares rose 1 percent to $2.92 at 1:28 p.m. in New York trading, after falling 17.9 percent yesterday.

The retailer’s new secured financing commitments will refinance its $450 million revolver and $175 million of term loans. Lenders include GE Capital, Salus Capital Partners, CIT Group Inc. and RBS Citizens NA, according to the statement.

The company, led by Chief Executive Officer Joe Magnacca, didn’t disclose in the statement how much it will pay for the debt, which it expects to close during the fourth quarter.

The existing $450 million revolver, which was arranged by Bank of America Corp. and Wells Fargo & Co., pays interest 2.25 percentage points more than the London interbank offered rate, according to data compiled by Bloomberg.

Its first-lien term loans have a rate of 4.5 percentage points more than Libor, while RadioShack’s second-lien term loan pays 10 percentage points more than Libor, with a 1 percent minimum on the lending benchmark, Bloomberg data show.

Under a revolver, money can be borrowed again once it’s repaid; in a term loan, it can’t.