Fitch Ratings has affirmed its ‘CCC’ Long-term Issuer Default Rating on RadioShack. Fitch also assigned ratings to the company’s new credit facilities.
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 operations.
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 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%).
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