RadioShack Lenders Claim Default; CEO Blasts Back

Term-loan lender demanding immediate repayment
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CEO Joe Magnacca took two of RadioShack’s lenders to task for attempting to pull the rug out from under it.

Fort Worth, Texas — CEO Joe Magnacca took two of RadioShack’s lenders to task for attempting to pull the rug out from under it.

Salus Capital Partners and Cerberus Business Finance, which provide the chain with a $250 million term loan facility, claim the retailer violated its covenants by entering into a recapitalization agreement with another investor group led by Standard General.

Under that deal, Standard General replaced GE Capital as lead lender on the company’s $535 million asset-based loan (ABL), and provided it with $120 million in cash to help buy inventory and fund operations through the holiday season in exchange for additional equity and a majority of seats on RadioShack’s board.

Salus claims the covenant breaches put both loans in default, and is demanding immediate repayment of its $250 million, plus interest.

In a blistering retort, Magnacca described the claims as “unfounded technical arguments” that are “wrong and self-serving,” and said Salus was guided by “narrow self-interest.”

The lenders “have repeatedly blocked our efforts to accelerate and intensify our turnaround and make smart decisions for our business,” he said in statement, and now “appear to be trying to manufacture a problem during the critical holiday shopping season in an effort to get out of a loan.”

Indeed, Salus has nixed Magnacca’s repeated requests to close upwards of 1,100 of its stores in an effort to reduce costs, trim losses and free up capital, creating long-simmering contention between the parties.

Under terms of the loan agreement, Salus – a secured creditor with a second lien on inventory and receivables – must approve any closings beyond 200 stores, and is reluctant to jeopardize its collateral.

Magnacca said Standard General will continue to stand by its agreements, and that RadioShack will vigorously contest Salus’ claims.

“We intend to do everything in our power to prevent them from using what we see as unfounded technical arguments to benefit unjustly at the expense of other creditors, the hundreds of communities we serve, the many other businesses we support and the jobs of more than 25,000 hard-working people,” he said.

The controversy prompted the New York Stock Exchange to temporarily halt trading in RadioShack shares, which fell nearly 11 percent in value after trading resumed this afternoon.

 In a research note, Janney Capital Markets retail analyst David Strasser suggested that Salus may be looking to accelerate a bankruptcy filing, which he believes is both inevitable in the near future and the best option for RadioShack to restructure its operations.

In the meantime, RadioShack said it intends to focus on executing its holiday business plan and will continue pursuing its cost-cutting efforts. Recent initiatives include cost reductions in IT and improved operational efficiencies at its distribution centers which will yield over $39 million in savings, plus rejiggered store hours at select locations that could reduce annual operating costs by $35 million.

In addition, the chain said it plans to reveal other ongoing cost reduction measures with its next earnings announcement that could save another $200 million or more in operating expenses and would “dramatically” improve its cash flow.

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