Fitch Rates RadioShack's Credit Facility 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch has rated RadioShack Corporation's (RadioShack) new $450 million senior secured asset-based revolving credit facility (ABL facility) at 'BBB-', two notches above the company's Issuer Default Rating (IDR) of 'BB'. Fitch has also affirmed RadioShack's IDR and unsecured notes at 'BB'. The Rating Outlook is Stable. RadioShack had $678 million in debt outstanding at Sept. 30, 2010. A full rating list is shown below.

The ABL facility will mature on Jan. 4, 2016 and contains an accordion feature which allows the company to increase the size to $650 million. The ABL facility will be used for working capital and general corporate purposes and replaces the company's existing $325 million senior unsecured revolving credit facility that was scheduled to mature on May 2, 2011. Fitch has withdrawn its rating on this credit facility.

The ABL facility is guaranteed by certain of RadioShack's existing and future direct and indirect domestic subsidiaries. It is secured by first priority liens on inventory, accounts receivables, bank accounts and securities accounts, and cash and cash equivalents. As of Sept. 30, 2010, RadioShack had $759 million in inventory, $258 million in accounts receivables, and $720 million in cash and cash equivalents. Pricing is LIBOR + 250 basis points (bps) for three months from the closing and then LIBOR + 225bps to 275bps subject to availability on the revolver. Availability under the ABL facility will be based upon periodic borrowing base valuations of the company's and the guarantors' inventory and accounts receivable (including certain trade and credit card receivables) and will be reduced by certain reserves.

The ratings continue to reflect RadioShack's relatively steady operating results as growth in its wireless business has offset soft sales trends in many of the company's other business segments. The ratings further reflect the company's positive free cash flow generation, relatively steady credit metrics, and adequate liquidity following RadioShack's redemption of the $307 million outstanding on the 7.375% senior notes on March 4, 2011. Longer-term concerns relate to RadioShack's long-term ability to maintain revenue and earnings growth given the technology cycle and highly competitive operating environment and the company's shareholder-friendly posture.

The growth in RadioShack's wireless revenues of 25% and 44% in 2009 and the first nine months of 2010, respectively, combined with the change in the company's product mix have enabled revenues to remain relatively steady despite a challenging economic environment (total revenues increased 1.2% and 5.0% in 2009 and the first nine months of 2010). The wireless product platform, which accounts for approximately 38% of 2009 total revenues, is expected to be the company's key growth driver going forward. This business has benefited from the addition of a third carrier, T-Mobile, in August 2009. In 2010 and 2011, total revenues are expected to increase in the low single-digit range based on assumptions of low single-digit positive same store sales and modest store growth (mainly kiosks in Target stores).

Fitch remains concerned about RadioShack's longer-term growth prospects as the company faces the challenges of turning around declining sales in non-wireless product platforms. In the event of an unexpected weakening in the company's operating performance or free cash flow generation, the company's ratings could be pressured. In addition, the consumer electronics industry is fiercely competitive. RadioShack competes with national big-box retailers and discounters as well as wireless carriers and other new wireless distribution channels. These retailers offer a wide selection of consumer electronics and wireless products. Nonetheless, RadioShack's large store base of 4,475 company-owned stores across the United States as of Sept. 30, 2010 will continue to provide a convenient shopping experience for customers.

RadioShack's profitability has benefitted from ongoing efforts to improve its inventory management by offering faster-turning products, such as Apple products and mobile accessories, and control costs, such as labor and rent expenses. EBIT margin has expanded by 50 bps to 9.2% in the last 12 months (LTM) ending Sept. 30, 2010 compared to 2009. This resulted in the LTM total adjusted debt/EBITDAR decreasing to 3.9 times (x) from 4.1x in 2009 and LTM EBITDAR to interest plus rent increasing slightly to 2.3x from 2.2x during the same time period. Fitch expects RadioShack's 2010 credit metrics to remain around 2009 levels and improve slightly in 2011 based on assumptions of similar operating profit levels and a lower debt balance in 2011 as the company repays the $307 million of senior unsecured notes due May 2011.

RadioShack had cash of approximately $720.3 million at Sept. 30, 2010 and no borrowings under its new $450 million ABL facility. Post the 2011 debt paydown, pro forma cash will be around the $400 million range and the only notes outstanding are the $375 million senior unsecured convertible notes due August 2013. Therefore, Fitch believes the company has adequate liquidity to meet upcoming capital and debt service requirements, including the completion of the remaining $200 million in the share repurchase authorization. In addition, the company should continue to generate positive free cash flow of approximately $90 million to $150 million in 2010 and 2011.

Fitch has the following ratings on RadioShack:

--IDR of 'BB';

--Senior secured asset-based credit facility of 'BBB-'

--Senior unsecured notes of 'BB'.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

-- 'Corporate Rating Methodology', dated Aug. 16, 2010;

-- 'The Retail Register', dated August 3, 2010;

-- '2011 Outlook: U.S. Retailers to See Continued Slow Growth', dated Nov. 17, 2010.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

The Retail Register -- Summer 2010

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543167

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