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RadioShack's Last Best Hope May Be Another Refinancing

NEW YORK (The Deal) -- For RadioShack (RSH - Get Report), much-needed financing from the likes of hedge fund Blue Crest Capital Management could be the electronics retailer's last best hope for buying time to effect a turnaround.

BlueCrest has offered to back a buyout of secured lenders that are resisting the company's plans to shutter up to 1,100 stores, according to a Bloomberg News report. Under existing credit agreements, senior lenders must approve store closures that exceed 200 in number.

Salus Capital Partners acts as administrative agent on the company's $250 million second-lien term loan, according to Bloomberg data.

RadioShack, BlueCrest and Salus all declined to comment on the situation, as did the retailer's financial adviser Peter J. Solomon Co.

But even if BlueCrest were to succeed in aiding the Fort Worth-based relic from the 1980s, a refinancing would only buy the company a short time as it pursues a turnaround.

"It is important to note that RadioShack just obtained a refinancing package in the fourth quarter of 2013 which added about $200 million in incremental liquidity, and here we are again already at this point," said Manoj Chadha, an analyst with Moody's Investors Service Inc., referring to the second-lien term loan.

Instead of giving RadioShack more breathing room for its turnaround, the situation has deteriorated rapidly and the markets are showing little confidence in the company's survival.

Short-term protection against a credit default by RadioShack has risen dramatically in price over the past month, suggesting a day of reckoning -- and a possible payday for holders of its credit-default swaps -- could possibly come within the next few months.

Following a nearly 40% jump in four weeks, the price of RadioShack's six-month credit-default swaps, expressed in points upfront, reached 54.85 on August 1, according to Bloomberg data. That put the initial cost to insure $10 million worth of the retailer's debt until early next year at $5.485 million, up from $3.25 million on June 30. The latest quote implies a 90%-plus chance that the company will default on its debt by early 2015.

"Time is not on [RadioShack's] side" said Fitch Ratings Ltd. senior director Philip Zahn in an e-mail. Still, he couldn't pinpoint exactly what was driving the recent widening in short-term spreads.

Blame, perhaps, a buildup of negative momentum, which -- in the absence of actual news -- is hard to arrest. Fitch warned on June 11 that "very tight" excess liquidity could prompt the company to restructure its debt before the end of 2014 -- a move that would trigger a payout to CDS holders with default protection of six months or longer.

Also on June 11 -- a day after the retailer posted disappointing quarterly results -- B. Riley equity analyst Scott Tilgham famously threw in the towel, lowering his 12-month share price target to $0.

Besides the markets turning against the company, the other parts of the restructuring, such as store renovations and new products, would also have to be effective in increasing traffic, stabilizing top-line and improving margins, Chadha said.

Chadha is sticking to his thesis that RadioShack has enough liquidity to survive until about October 2015, in a July 29 report, or for about another 12 months under a base scenario. That assumes normalcy in vendor relationships and no new infusion of cash.

Worst case scenario, if vendors do get nervous and start tightening credit, RadioShack may run out of cash within the next two to three quarters, he said.

However, RadioShack doesn't have enough cash on its balance sheet to make it through the critical holiday quarter if there is a tightening in vendor credit en masse. Such a tightening could hasten a bankruptcy filing, the analyst said.

Still, Chadha added, "It is highly speculative at this stage as to what vendors will do. As of the writing of our report, a vast majority of vendors were not demanding letters of credit or cash upfront. But that may be changing since the report was issued."

Once vendors get a sense that they might not get paid, the retailer is doomed, he said.

A new refinancing scenario where RadioShack is able to get incremental liquidity at the same time as it's allowed to close more stores, would buy the company some extra time, but that alone wouldn't change its trajectory, Chadha said.

To its credit, RadioShack has no debt due in the next year and total liquidity, as of May 13, stood at $424 million, primarily reflecting availability under its existing revolver. Still, between seasonal inventory builds and its bloated, money-losing operations, the retailer could burn through 95% of that cushion by January, Fitch said recently.

Amid fierce competition from the likes of Amazon.com Inc. and Apple Inc., cost cutting, meanwhile, may be more bandage than cure. Also, the company's backers remain at odds over the best way to effectuate a turnaround, which has delayed the implementation of major changes.

In the recent quarter ended May 3, RadioShack posted a loss of $98.3 million, as year-over-year sales declined 13%, to $736.7 million. Analysts, on average, said they expect the company to lose $334 million for the fiscal year ending January 15, 2015.

Coinciding with the rising cost of short-term default protection has been an increase in the number of open CDS contracts linked to RadioShack's debt. As per the Depository Trust & Clearing Corp., the number of open RadioShack CDS contracts stood at 6,134 on August 1, up 2.0% from 6,013 at July 25 and 4.5% above the 5,871 level on July 18. On a gross notional basis, the Aug. 1 figure reflected bets totaling nearly $25 billion — more than 40 times the retailer's recent debt load of $614.5 million. With a market capitalization of just $65 million, RadioShack now may be a bit player in retail. But it remains a popular CDS trade that could pay off in the next six months. 

--Nils Van Liew contributed to this report.

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