TEXT-Fitch cuts RadioShack's issuer default rating to 'CCC'
July 25 - Fitch Ratings has downgraded its long-term Issuer Default Rating (IDR) for RadioShack Corporation (RadioShack) to 'CCC' from 'B-'. As of June 30, 2012, RadioShack had approximately $680 million of debt outstanding. A full list of rating actions is shown below. The downgrade reflects the significant decline in RadioShack's profitability, which has become progressively more pronounced over the past four quarters. Results have been disappointing, due in particular to pressure on the company's mobility segment, leading 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. In addition, sharp declines in cash flow, together with the expected repayment of the $375 million of convertible notes maturing in August 2013, will materially reduce the company's financial flexibility. RadioShack's comparable store sales were flat in the second quarter ended June 30, 2012, and have been negative in four of the past five quarters due to mixed results in the mobility segment (51% of 2011 sales), sharp declines in the consumer electronics segment (19% of sales), and flattish sales in the signature segment (29% of sales). Weakness in sales have coincided with significant margin compression, with the gross margin off by over 800 basis points in the second quarter versus the second quarter of 2011, due primarily to pressure within the mobility segment. EBITDA for 2Q'12 was negative $0.1 million (assuming stock based comp of $1.8 million) versus $83 million in 2Q'11. In the 12 months ended June 30, 2012, EBITDA fell to $145 million from $284 million in 2011 and $473 million in 2010. This caused lease adjusted debt/EBITDAR to increase to 6.8 times (x) at June 30, 2012, from with 5.1x at end-2011. Fitch now expects leverage will trend above 7x over the next two years as EBITDA will likely erode further, potentially to the $100 million range for 2012. RadioShack's mobility segment generated 3.3% growth in the second quarter, while margins declined sharply due to the growth of smart phone sales (iPhones in particular). The growth in the Verizon Wireless business has been slower than expected since it was introduced in September 2011. The mobility segment is a lower-margin business operating in a competitive space, and consumer awareness of RadioShack's mobile phone offerings is low, as the bulk of industry-wide wireless transactions are completed at the carrier's stores. The longer-term prospects for this segment are uncertain. RadioShack's other two segments are in decline: signature (29% of 2011 sales) and consumer electronics (19%). The signature business, which includes sales of accessories, power and technical products sales, generates healthy margins but had flat sales in the second quarter following a 4% sales decline in 2011. The consumer electronics segment experienced a 26.5% sales decline in the second quarter and a 19% sales decline in 2011, reflecting the competitive nature of that business as sales shift to the online channel. The 'other' segment includes the Target mobile centers, which are contributing to top line growth, though Fitch believes they are a drag to earnings. Overall, Fitch expects that the company will need to continue to be promotional given the challenging economy, price-sensitive consumer and largely commoditized consumer electronics space. RadioShack currently has adequate liquidity, with $517 million in cash (excluding restricted cash) and $393 million available on its secured credit facility as of June 30, 2012. Availability on the credit facility, which expires on Jan. 4, 2016, has been reduced by 12.5% ($56.3 million) from $450 million given that the fixed charge coverage (FCC) ratio dropped below 1x as of the end of the second quarter. RadioShack is suspending its dividend (annual rate of $50 million) to preserve liquidity. In addition, while the company has sufficient cash on hand to repay its nearest debt maturity, the $375 million of 2.5% convertible notes due August 2013, doing so will materially reduce its financial flexibility. The company is contemplating refinancing approximately 50% of the maturity over the coming months. 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 around $660 million. Applying this value across the capital structure results in an outstanding recovery prospect (91%-100%) for the asset-based revolver. This revolver is collateralized by a first lien on inventory and receivables. The revolver, which is currently unused, is subject to a borrowing base, which currently exceeds the facility size. There are no maintenance covenants in the revolver or the notes, although availability is reduced by 12.5% of the facility size if the company's fixed charge coverage ratio drops by 1:1. The downgrade of the Recovery Rating on the unsecured senior notes and convertible notes to RR5 from RR4 reflects more conservative assumptions with regard to advance rates against receivables and inventories in a distressed liquidation. These notes have below average recovery prospects (11%-30%). WHAT COULD TRIGGER A RATING ACTION? Positive: A stabilization in the business leading to a sustainable recovery in operating trends and financial flexibility could lead to an upgrade. This is not expected in the near to intermediate term. Negative: 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 downgraded the following ratings: RadioShack Corporation --IDR to 'CCC' from 'B-'; --$450 million secured revolving credit facility to 'B+/RR1' from 'BB-/RR1'; --Senior unsecured notes to 'CC/RR5' from 'B-/RR4'.
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