RadioShack lifeline leaves bonds in distress

Charles Mead and Matt Robinson (c) 2013, Bloomberg News

RadioShack’s $835 million in new loans are doing little to placate bondholders focused on cash burn even as the financing gives the electronics retailer as much as a three additional years to restore profitability.

The company’s $324.8 million of 6.75 percent notes have dropped 7.88 cents to 66.75 cents on the dollar since Fort Worth, Texas-based RadioShack said Oct. 22 it had obtained financing commitments amid a $112.4 million quarterly loss. CreditSights Inc. estimated the new financing, the final terms of which were announced Dec. 10, will almost double borrowing costs on the Fort Worth, Texas-based company’s term loans, which are increasing by $125 million to $300 million.

While the transaction will boost liquidity by about $200 million from $613 million at the end of September, a worse same- store-sales performance in the third quarter than 95 percent of U.S. specialty retailers has RadioShack’s bonds yielding 16.2 percent, almost three times the average for high-yield, high- risk notes. Chief Executive Officer Joe Magnacca is struggling to rehabilitate a business, whose market value exceeded that of Inc. in 2002, after seven straight quarterly losses.

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“We’ve been alarmed with how quickly things have deteriorated,” Joscelyn MacKay, a Chicago-based credit analyst at Morningstar Inc., said in a telephone interview. “The offering gives RadioShack more runway, but they’ll need more cash to fund its operations. We don’t see this turning around.”

Analysts surveyed by Bloomberg estimate the company will burn through $157.6 million of cash next year. Its cash was $316.4 million on Sept. 30. The retailer’s gross margin dropped to 30.1 percent last quarter, down from more than 50 percent in 2005 and the weakest performance in more than a decade.

Ruth Pachman, a spokeswoman for the company at Kekst & Co., declined to comment beyond its Dec. 10 statement.

The loan deal “provides the financial flexibility and ample runway to turn this business around,” Magnacca said in the statement. “We are focused on delivering a great RadioShack experience for the millions of our customers who choose to shop with us this holiday season.”

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Deteriorating operations have contributed to a yield on its 6.75 percent notes due in May 2019 that’s more than double the average 7.8 percent yield-to-worst for similarly rated securities tracked by Bloomberg. RadioShack’s bonds are ranked Caa2 at Moody’s Investors Service and an equivalent CCC by Standard & Poor’s, and they yield about 14.71 percentage points more than comparably dated Treasuries, above the 10-point threshold for bonds considered distressed.

“That’s alarmingly high,” William Larkin, a money manager who oversees about $520 million in assets at Cabot Money Management in Salem, Massachusetts, and doesn’t own RadioShack bonds, said in a telephone interview. “The market’s telling us that the outlook isn’t great.”

Lofty bond yields and a stock market value that’s collapsed to $271 million from $5.8 billion in 2004 may have destroyed RadioShack’s ability to raise funds via an unsecured debt offering or equity sale, signaling the loan transaction amounts to a “last-chance liquidity injection,” according to James Goldstein of debt-researcher CreditSights.

“While the incremental liquidity buys the company time, it also stands as a risk to recovery for the existing bondholders in the event that the company is unable to get back on its feet,” Goldstein, who rates the notes “underperform,” wrote yesterday in a report estimating borrowing costs on the term loan portion will almost double to $31 million per year.

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Total annual interest expense has exceeded $50 million for the past seven quarters, up from $35 million in 2008, according to data compiled by Bloomberg.

RadioShack’s new financing includes a $250 million, second- lien term loan due in five years that pays interest at 11 percentage points more than the London interbank offered rate, a similar-maturity $535 million asset-based revolving credit line and a $50 million loan set at 4 percentage points more than Libor, according to the Dec. 10 statement.

The transaction allows RadioShack to retire a $100 million second-lien loan due 2017 and replace its $450 million revolver expiring in 2016.

“Absent a significant improvement in operating performance, this is probably the last new financing that RadioShack is going to get,” said Mickey Chadha, a senior analyst at Moody’s. “Last quarter didn’t inspire confidence in terms of their turnaround.”

Same-store-sales, a key measure of a retailer’s growth because new and closed stores are excluded, sank 8.4 percent last quarter from a year earlier, Bloomberg data show. That’s the biggest decline since 2008 and compares with an average 3.1 percent increase for U.S. specialty retailers with market values larger than $100 million.

High-yield, high-risk, or junk, bonds are rated below Baa3 by Moody’s and BBB- at S&P. A basis point is 0.01 percentage point.

RadioShack, which began life in 1921 as a Boston-based mail-order retailer serving amateur ham radio operators and maritime communications officers, faces mounting losses as competition rises from retailers such as Amazon and Wal-Mart Stores Inc. that sell products from televisions to cable connectors. That’s left RadioShack more dependent on mobile phones, which have thinner profit margins.

The company’s stock has declined 23 percent since Oct. 21.

“Traffic is increasingly price-sensitive and going online, and because the margins are so high that product is easier to discount,” Michael Pachter, an analyst at Wedbush Securities, said in a telephone interview. He has the equivalent of a sell rating on the shares. “Either RadioShack loses the sale, or it sees its margins collapse because it’s trying to match price.”

— With assistance from Lindsey Rupp in New York.