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Fitch Ratings: RadioShack’s cost-cutting not likely to prevent debt restructruing


NEW YORK - The massive cost cutting plan outlined on Thursday, Dec.11, by RadioShack is likely not sufficient to forestall a restructuring of the company's debt in the near term, according to Fitch Ratings.

RadioShack's liquidity is severely strained, with $43.3 million of cash and $19.3 million of availability on its credit facility at quarter-end (Nov. 1, 2014), 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.

Fitch estimates that RadioShack will have negative free cash flow of up to $80 million during the fourth quarter of 2014, based on EBITDA of negative $40 million - 50 million (improved from negative $97 million a year earlier), interest expense of $20 million and capex of $10 million.

Assuming some benefit from working capital during the fourth quarter, currently available liquidity would essentially cover the estimated fourth quarter cash burn.

In Fitch's view, RadioShack does not have material sources of liquidity beyond its revolver as virtually all of its assets have been pledged to its credit facilities. As a result, there continues to be a high likelihood of a bankruptcy filing or other outcome that is detrimental to bondholders.

On Dec. 1, 2014, the company received a notice of default and acceleration from Salus Capital Partners, the agent for the $250 million term loan. The notice of default asserts that the Oct. 3, 2014 recapitalization was a prohibited affiliate transaction that resulted in an impermissible over-advance on the facility, restricted RadioShack's ability to make payments on the term loan, and overstated the borrowing base.

RadioShack disputes these assertions. If it is determined that an event of default has occurred, this will trigger a cross-default in the $585 million ABL facility, and an acceleration of the term loan would be an event of default of the $325 million of senior unsecured notes.

Per Fitch's recovery analysis, Fitch believes that the $585 million senior secured ABL facility is well secured and would receive a full recovery. The $250 million term loan has superior recovery prospects (71-90%), and the $325 million of senior unsecured notes have poor recovery prospects (0-10%).
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