RadioShack is Denying it Violated Debt Covenants

RadioShack Corp. (RSH) issued a point-by-point response to a claim by its lenders tied to a $250 million term loan, on which Salus Capital Partners LLC is the administration agent, that it has violated covenants on its debt.

The response was detailed in a Securities and Exchange Commission filing on Monday.

When reached, Salus did not provide a comment.

RadioShack is disputing the lender's claim that a default occurred and said it "does not believe that the demand for immediate payment or any other exercise of remedies has any merit."

Part of Salus' contention is that RadioShack entered into a recapitalization and amended asset-based loan credit facility with what the original lending documents considered "prohibited affiliates," including General Retail Holdings and General Retail Funding. Salus said that those two are affiliates because investors in them, such as Standard General, own more than 10% of RadioShack's stock, putting them in the prohibited category.

Both General Retails were part of a new lending facility arranged by Standard General LP. But RadioShack said that, even if "expansive concepts of beneficial ownership" were applied, they would still not be considered as owning more than 10% of RadioShack's voting stock. However, the retailer added, that definition doesn't apply in this situation.

General Retail Holdings does have the right to designate directors if the transactions contemplated by the recapitalization agreement occur in 2015. RadioShack argued that did not give it control over the retailer at the time of the refinancing or as of today.

Salus has also asserted that the conversion of revolving loans to term loans under the asset-based loan credit facility resulted in a reduction in revolving commitments causing an over-advance, something also not permitted by its loan documents.

But RadioShack said that its revolving loan commitments are still $535 million and that those commitments were not permanently reduced under the amendment.

Lastly, the Salus group said that RadioShack overstated the ratio of the liquidation value of the inventory to the cost of such inventory, resulting in additional credit being made available to RadioShack in violation of the term loan credit agreement.

In response, RadioShack said it had never provided an inventory liquidation valuation that was not permitted by or inconsistent with the inventory appraisal obtained by the asset-based loan agent and in accordance with the terms of the credit agreement tied to the ABL credit facility.

Meanwhile, holders of credit default swaps have requested that the International Swaps and Derivatives Association determination committee consider a "failure to pay" event under RadioShack CDS contracts, claiming that the event was triggered by the rejection of the default notice sent by the second lien lenders led by Salus, according to credit analyst firm CreditSights.

James Goldstein, an analyst at CreditSights, said that the request likely has sufficient merit for ISDA to take up the question. However, reaching a speedy conclusion in a situation where both parties have contradictory opinions on default may require the proceedings to play out in court before ISDA can reach a definitive conclusion.

It is likely that whoever is pushing the process are holders of short-term CDS contracts who made the bet that RadioSahck would go into default before Dec. 20, the analyst said.

But if RadioShack continues to claim it didn't breach any covenants, and it ends up in a court battle with the Salus-led second lien lenders, the court case could extend into next year, he said.

Goldstein said that the term loan lenders may have an argument in regards to what is considered an affiliate, and the liquidation value of inventory, but both sides would ultimately have to present their arguments in court.

Salus likely wanted to wait until peak inventory on Black Friday to send the default notice, rather than sooner, because that might have scared away vendors, Goldstein said. It is still a more desirable scenario even if litigation drags the situation out into the new year, he added.

Many alternative scenarios could play out, Goldstein cautioned, as the term loan lenders simply want to maximize recovery.

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