TEXT-Fitch rates RadioShack's new term loans
(The following statement was released by the rating agency)
Oct 8 - Fitch Ratings has taken the following rating actions on RadioShack Corporation
(RadioShack): --Long-term Issuer Default Rating (IDR) affirmed at 'CCC'; --$450 million senior secured revolving credit facility affirmed at 'B/RR1'; --$50 million senior secured term loan assigned 'B/RR1'; --$100 million senior secured term loan facility assigned 'B-/RR2'; --Senior unsecured notes downgraded to 'CC/RR6' from 'CCC-/RR5'.
The ratings reflect the significant decline in RadioShack's profitability, which has become progressively more pronounced over the past four quarters. Results have been disappointing, due in particular to pressure on the company's mobility segment, leading 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. In addition, sharp declines in cash flow, together with the expected repayment of the $375 million of convertible notes maturing in August 2013, is expected to materially reduce the company's financial flexibility.
RadioShack's comparable store sales were flat in the second quarter ended June 30, 2012, and have been negative in four of the past five quarters due to mixed results in the mobility segment (51% of 2011 sales), sharp declines in the consumer electronics segment (19% of sales), and flattish sales in the signature segment (29% of sales).
Weakness in sales have coincided with significant margin compression, with the gross margin off by over 800 basis points in the second quarter versus the second quarter of 2011 (2Q'11), due primarily to pressure within the mobility segment. EBITDA for 2Q'12 was negative $0.1 million (assuming stock based comp of $1.8 million) versus $83 million in 2Q'11. In the 12 months ended June 30, 2012, EBITDA fell to $145 million from $284 million in 2011 and $473 million in 2010.
This caused lease adjusted debt/EBITDAR to increase to 6.8 times (x) at June 30, 2012, from with 5.1x at end-2011. Fitch now expects leverage will trend above 7x over the next two years as EBITDA will likely erode further, potentially to the $60 million-$80 million range for 2012.
RadioShack's mobility segment generated 3.3% growth in the second quarter, while margins declined sharply due to the growth of smart phone sales (iPhones in particular). The mobility segment is a lower-margin business operating in a competitive space, and consumer awareness of RadioShack's mobile phone offerings is low, as the bulk of industry-wide wireless transactions are completed at the carrier's stores. The longer-term prospects for this segment are uncertain.
The signature business (29% of 2011 sales), which includes sales of accessories, power and technical products sales, generates healthy margins but had flat sales in the second quarter following a 4% sales decline in 2011. The consumer electronics (19% of 2011 sales) segment experienced a 26.5% sales decline in the second quarter and a 19% sales decline in 2011, reflecting the competitive nature of that business as sales shift to the online channel. Overall, Fitch expects that the company will need to continue to be promotional given the challenging economy, price-sensitive consumer and largely commoditized consumer electronics space.
RadioShack currently has adequate liquidity, with $517 million in cash (excluding restricted cash) and $393 million available on its secured credit facility as of June 30, 2012. RadioShack has suspended its dividend (annual rate of $50 million) to preserve liquidity. In addition, while the company has sufficient cash on hand to repay its nearest debt maturity, the $375 million of 2.5% convertible notes due August 2013, doing so is expected to materially reduce its financial flexibility. The $150 million in new notes will be used to refinance up to 40% of the convertibles and Fitch expects the remainder to be mainly paid down with cash.
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 around $600 million. Applying this value across the capital structure results in an outstanding recovery prospect (91%-100%) for the asset-based facility which includes both the revolver and the new $50 million term loan (which has a last-out provision) tranche and are therefore rated 'B/RR1'. The ABL facility is collateralized by a first lien on receivables, inventory and select real estate.
The $100 million term loan facility has a first lien on (i) intellectual property, (ii) furniture, fixtures, machinery & equipment; and, (iii) all other owned real estate (which is very minimal). The term loan facility also has a second lien on the collateral securing the ABL facility. Fitch anticipates that recovery to the term loan facility will primarily depend on its second lien collateral as it does not attribute material value to its first lien collateral. As the $100 million term loan facility is essentially 'third' in line on the inventory and receivables collateral, Fitch rates this one notch lower than the ABL facility at 'B-/RR2', indicating recovery of 70%-90%.
Fitch estimates very little remaining proceeds to unsecured creditors and has downgraded the rating unsecured senior notes and convertible notes to 'CC/RR6' from 'CCC/RR5'. These notes have poor recovery prospects given default (0%-10%).
WHAT COULD TRIGGER A RATING ACTION?
Positive: Stabilization in the business leading to a sustainable recovery in operating trends and financial flexibility could lead to an upgrade. This is not expected in the near to intermediate term.
Negative: Continued deterioration in EBITDA that further constrains cash flow and liquidity and impedes the company's day to day operations would lead to a downgrade.
(Caryn Trokie, New York Ratings Unit)