Investors bet on RadioShack default as loss grows

RadioShack closes a store in New York.
Adam Jeffery | CNBC

RadioShack's credit default swap spreads reached their widest on record Thursday, ahead of a critical decision over whether the electronics retailer breached a covenant with one of its key lenders.

The International Swaps and Derivatives Association's Credit Derivatives Determinations Committee met for the second consecutive day on Thursday, to determine if a credit event was triggered by a refinancing agreement RadioShack entered with Standard General in October.

The committee failed to reach a decision and agreed to reconvene on Friday.

According to Fitch Solutions, five-year credit default swaps for RadioShack have widened 93 percent since the beginning of December. When credit default spreads widen, it indicates that more people are betting on the firm to default on their debt.

"Mounting market concern for RadioShack comes amid speculation over whether a failure to pay credit event has occurred," said Fitch Solutions director Diana Allmendinger. "If ISDA determines that a credit event has indeed taken place, this would trigger a payout on CDS contracts referencing RadioShack."

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The lender in question is Salus Capital, which is arguing that RadioShack breached the terms of its $250 million term loan facility when it entered into an agreement with Standard General. Salus is demanding immediate payment.

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

The electronics chain on Thursday reported a larger-than-expected loss for the third quarter, with same-store sales and revenue coming in short. Its biggest hit came from its mobile business, which struggled, in part, due to "constrained" volume on items including Apple's latest iPhone models. Mobile makes up about half of RadioShack's revenue.

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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.

In a note following RadioShack's earnings report, Standard & Poor's said it still expects the electronics chain 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. "RadioShack does not agree with the claims and is contesting them, but gaining the necessary consent from those lenders could be difficult."

S&P said it views a default as "very likely" in the near term, unless RadioShack raises additional liquidity or significantly improves its operating trends. The ratings firm added that a restructuring or change in terms for its existing obligations are also "tantamount" to a default.

(UPDATED: This story was updated to provide the status of ISDA committee's meeting and to add comments from S&P.)