CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'CCC' Long-term Issuer Default Rating (IDR) on RadioShack Corporation (RadioShack). Fitch has also assigned ratings to the company's new credit facilities. A full list of rating actions follows at the end of this release.
Key Rating Drivers:
The IDR reflects the significant decline in RadioShack's profitability and cash flow, which has become progressively more pronounced over the past two years. Weak results have been due in particular to the gross margin pressure in the company's mobility segment (around 50% of sales), and have led to a marked deterioration in the company's credit profile. There is a lack of stability in the business and no apparent catalyst to stabilize or improve operations.
EBITDA was negative $69 million in the 12 months ended Sept. 30, 2013, and Fitch estimates it will be in the negative $80 million-$100 million range in 2013, with no improvement expected in 2014/2015. Fitch expects capex to run at $50 million annually, while interest expense is expected to be around $50 million in 2013 and closer to $55 million in 2014/2015. Free cash flow (FCF) is expected to be in the negative $100 million range for 2013, assuming some benefit to working capital from planned inventory reductions this year.
Fitch expects RadioShack to end 2013 with about $250 million-$300 million in cash and full availability on its $535 million revolving credit facility. Beyond 2013, FCF could track at negative $175 million to $200 million annually, and RadioShack will have to fund its fourth-quarter seasonal working capital swing estimated at $150 million-$250 million. This will drain the company's liquidity position materially over the next 24 months.
New Credit Facilities:
On Dec. 10, 2013, RadioShack entered into new five-year credit facilities, composed of a $585 million senior secured asset-based lending (ABL) credit facility, and a $250 million secured term loan. This represents an incremental $200 million of gross liquidity (before significant upfront financing costs), including an $85 million increase in the size of the revolver and $125 million of additional term loans. There are no financial maintenance covenants in either of the new facilities.
The ABL credit facility includes a $535 million revolver at a borrowing rate of LIBOR plus 2.0%-2.5%, and a $50 million first-in-last-out term loan at LIBOR plus 4%. The facility is secured by a first lien on current assets and a second lien on fixed assets, intellectual property and stock of subsidiaries. The $250 million term loan is secured by a first lien on fixed assets, intellectual property and stock of subsidiaries, and a second lien on current assets, and is at a borrowing rate of LIBOR plus 11%.
Recovery Analysis:
The ratings on the various securities reflect Fitch's recovery analysis, which is based on a liquidation value of RadioShack in a distressed scenario of $576 million as of Sept. 30, 2013. Most of the value comes from inventories, of which half are assumed to be mobile phones which are assigned a liquidation value of 85%, and the balance are other inventories at a liquidation value of 50%. Fitch uses a liquidation value of 30% for receivables to reflect the netting out of estimated payables to the wireless carriers.
The ABL facility, including both the $535 million revolver and a $50 million term loan, has outstanding recovery prospects (91%-100%), and a rating of 'B/RR1'. The $250 million term loan is rated two notches below the asset-based facility, at 'CCC+/RR3', implying good recovery prospects of 51%-70%. The $325 million of senior unsecured notes due in May 2019 are rated 'CC/RR6', reflecting poor recovery prospects (0%-10%).
Rating Sensitivities:
Stabilization in the business leading to a sustainable recovery in operating trends and financial flexibility could lead to an upgrade. EBITDA would have to reach at least a cash flow breakeven level of $100 million (capex of $50 million and interest expense of at least $50 million), which is not expected in the near- to intermediate-term.
Continued deterioration in EBITDA that further constrains cash flow and liquidity, and impedes the company's day-to-day operations would lead to a downgrade.
Fitch has taken the following rating actions:
RadioShack Corporation
--Long-term IDR affirmed at 'CCC'
--$535 million senior secured ABL revolver rated 'B/RR1';
--$50 million senior secured ABL term loan rated 'B/RR1'
--$250 million secured term loan rated 'CCC+/RR3'
--Senior unsecured notes affirmed at 'CC/RR6'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 20, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812914
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.