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Fitch Affirms RadioShack’s IDR at ’CCC’; Rates New Credit Facilities

December 24, 2013, 08:02 AM
Filed Under: Corporate Ratings

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.

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 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%.

Recovery Analysis:

The ratings on the various securities reflect Fitch's recovery analysis, which is based on a liquidation value ofRadioShack 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%).

To view the entire Fitch Ratings release, click here.

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