Fitch Foresees RadioShack Restructuring - Twice

Fitch Foresees RadioShack Restructuring

Cites “severely strained” liquidity
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Bankruptcy is the likely outcome for RadioShack, Fitch Ratings said.

New York — Bankruptcy or some other debt restructuring is the likely outcome for RadioShack, Fitch Ratings said.

The credit rating service cited the chain’s “severely strained” liquidity and estimated negative free cash flow of up to $80 million this quarter.

In addition, an ambitious cost-cutting plan laid out yesterday by RadioShack CEO Joe Magnacca, designed to add $400 million a year in earnings, was deemed insufficient by Fitch to forestall a debt restructuring in the near future.

“RadioShack does not have material sources of liquidity beyond its revolver as virtually all of its assets have been pledged to its credit facilities,” the rating service said. “As a result, there continues to be a high likelihood of a bankruptcy filing or other outcome that is detrimental to bondholders.”

RadioShack reported $43.3 million of cash and $19.3 million of availability on its credit facility as of the end of its third quarter on Nov. 1, for total liquidity of $62.6 million. This compares with liquidity of $183 million at the end of the second quarter and $424 million at the end of the first quarter.

The company also reported weak third-quarter results, including a 13.4 percent decline in comp sales, a 16.1 percent drop in net sales and operating revenues, and a net loss of $161.1 million.

Magnacca said his cost-cutting program, to be completed next month, would result in nearly $300 million in annual savings from store operations and regional management ($100 million), marketing ($105 million), professional fees ($41 million), store and other overhead ($28 million), and headquarters ($21 million).

Fitch lauded the effort, which represents a sizable 21 percent of RadioShack’s last-12-months operating expenses of $1.4 billion, and described it as “a substantial operational restructuring over a very short period of time.”

Even still, absent the completion of widespread store closures — a move that has been repeatedly blocked by term lenders — the chain would likely remain in a negative earnings position, Fitch said.

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