RadioShack lives another day: Didn't breach covenant

Radio Shack
Adam Jeffery | CNBC

It's not game over for RadioShack.

A special committee ruled unanimously on Friday that no credit event was triggered when the electronics chain entered into a refinancing agreement with Standard General in October.

One of the electronics chain's key lenders, Salus Capital, accused RadioShack of breaching the terms of its $250 million loan with the refinancing agreement, and Salus demanded immediate payment.

Salus declined to comment on the outcome.

Ahead of the decision Friday, RadioShack's credit default swap spreads had widened 144 percent, reaching their widest on record, according to Fitch Solutions. When credit default spreads widen, it indicates that more people are betting on the firm to default on their debt.

Fitch Solutions director Diana Allmendinger said that if the committee of the International Swaps and Derivatives Association had determined that a credit event had taken place, it would have triggered a payout on CDS contracts for RadioShack. According to data from the Depository Trust & Clearing Corp., as of last Friday, the approximate payout would have been $593.6 million.

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Although the electronics chain will live to fight another day, it is by no means in the clear. In a note following its earnings report Thursday, Standard & Poor's said it still expects the RadioShack to incur significant cash burn and for liquidity to remain weak, with "very limited liquidity sources at this point."

"To achieve the cost savings from store closures, the company must first gain approval from secured lenders, who have sent a notice of default and acceleration of that loan to the company," S&P said.

S&P said it expects "gaining the necessary consent from those lenders could be difficult," and it views a default as "very likely" in the near term, unless RadioShack raises additional liquidity or significantly improves its operating trends.

During its earnings call on Thursday, RadioShack CEO Joe Magnacca had reiterated that the company would contest Salus' allegations, which it has called "wrong and self-serving."

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The electronics chain reported a worse-than-expected loss for the third quarter, with same-store sales and revenue coming in short. On a conference call, Magnacca outlined steps to save $400 million annually, including trimming $105 million in marketing spending and $90 million from potential store closings.

The planned savings from store closings, Magnacca noted, will depend on lender approval. Earlier this year, lenders blocked RadioShack's plan to close 1,100 stores. The company said Thursday it has closed 175 stores so far this year.