Daily News: December 3, 2014

Salus Capital Claims RadioShack Covenant Breach

RadioShack announced it received a notice from Salus Capital Partners, a unit of Harbinger Group, claiming covenant breaches under the $250 million term loan facility provided by Salus and Cerberus Business Finance, a unit of Cerberus Capital Management.

The claims relate primarily to the recapitalization and investment agreement and amendment to the company’s ABL credit facility, which in each case were entered into by the company on October 3, 2014. RadioShack believes these claims are wrong and self-serving.

RadioShack intends to vigorously contest the claims. The Company has been advised by lenders holding a majority of the loans and commitments under its ABL credit facility that they intend to continue to extend credit to the Company in accordance with the terms of the ABL credit facility.

Joe Magnacca, RadioShack’s chief executive officer, said, “We will do everything we can to assure that these claims do not distract us from our ongoing efforts to rationalize our capital structure and transform our business. We will maintain our focus on operating our business as we move forward.”

Magnacca continued: “Despite their intimate knowledge of the challenges that RadioShack faced when they extended credit to us late last year, our current term lenders have repeatedly blocked our efforts to accelerate and intensify our turnaround and make smart decisions for our business. Now, prompted by their narrow self-interest, they appear to be trying to manufacture a problem during the critical Holiday shopping season in an effort to get out of a loan on which they have already reaped more than $35 million in fees and interest payments.”

“We intend to do everything in our power to prevent them from using what we see as unfounded technical arguments to benefit unjustly at the expense of other creditors, the hundreds of communities we serve, the many other businesses we support and the jobs of more than 25,000 hard-working people,” Magnacca said.

Magnacca continued, “This is particularly disturbing in light of meaningful steps we have taken in our turnaround plan, as well as the recapitalization steps announced in October which, if conditions are satisfied, would result in the conversion of at least $120 million of debt into equity.” Among the operational steps taken by RadioShack are the following:

  • The company has reconfigured store hours at select locations that are expected to reduce annual operating costs by $35 million and have also completed major cost reduction projects, principally saving costs in IT and more efficient DC operations, of over $39 million.
  • As the Company has communicated clearly to the term lenders, it has additional cost-reduction measures in process that it intends to announce in connection with its upcoming quarterly earnings release, which it believes could save an additional $200 million or more in operating expenses beyond the impact of the store closures, dramatically improving the cash flow of its business.
  • An additional critical cost reduction measure involves the closure of up to 1,100 stores so that the Company can focus on its profitable, go-forward locations. Earlier this year, RadioShack asked the term lenders for consent to close these stores, which the company estimates would have enhanced overall EBITDA by about $83 million and created an additional $87 million of liquidity from reduced and focused inventory levels. They refused unless the company paid significant fees, prepaid a substantial portion of their debt and agreed to other covenants and concessions that the company believed to be unreasonable, even though these store closures would have clearly benefited the company and its stakeholders.

    Then, in late October, RadioShack requested that the term lenders consent to the closure of a smaller but significant portion of these same stores, but they again refused. Most recently, RadioShack repeated its request that the term lenders consent to permit the closure of up to 1,100 stores to provide the company with a rational store base going forward, and yet still has not received their approval. For RadioShack, these requests, for months, have been about the company’s continued efforts to transform its business, serve its customers and preserve the jobs of the vast majority of its employees.

    Magnacca concluded: “It appears to us that the term lenders seek only to advance their particular interests at the expense of all other RadioShack stakeholders and will oppose any common sense business move requiring their consent unless the company agrees to their exorbitant demands. The company calls on them to rescind their notice and related demands and instead grant approval for the company to take action that would benefit all creditors and other stakeholders.”

    To read the press release and Notice of Default and Acceleration letter as part of the 8-K filing dated December 2, 2014, click here.

    Previously on abfjournal: Monarch Said to End Talks on RadioShack Loan, November 19, 2014