RadioShack CDS take beating after earnings falter

Tue Jul 23, 2013 3:36pm EDT

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July 23 (IFR) - Synthetic spreads and cash bonds issued by RadioShack deteriorated on Tuesday as the market increasingly priced in a likelihood that the troubled electronics retailer will default on its debt.

The company's CDS spreads ballooned out 90 basis points to 1495 in the five-year maturity - reflecting an increased expectation of default - after it reported disapponting second-quarter earnings.

According to Starmine, a Thomson Reuters data service, RadioShack is the constituent of the CDX HY20 index with the highest probability of default.

On a scale of 1 to 100, highest to lowest, it puts the company's structural default probability risk at 2.

And investors appear to be increasingly buying CDS - essentially protection against a default - in the name.

According to data from DTCC, the net notional levels of CDS outstanding on RadioShack have risen for the past three weeks. Last week net positions increased more than 8.5%, with 571 CDS contracts added - 367 of them new trades.

The bearish view of the company's profile has not been limited to credit default swaps (CDS), as its cash bonds have also been struggling in the secondary market.

RadioShack's 6.75s due May 15, 2019 were down on the day by roughly $4 and are flat on the month at $72.00. In May, the bond was near $80.

Accompanying the CDS widening and cash erosion, the company's CDS curves have either inverted or moved significantly closer to inversion in a very short period of time.

The shorter-term 3s/5s dropped to 8.66bp as of Monday from 109.87 as of July 10. Meanwhile the intermediate view reflected by the 5s/10s curve has been driven further into negativity.

It was at -111.94bp on Monday from -37.5bp on July 10.

The downwardly sloping curve implies an increasing probability of default is being priced into the name.

The company has seen sentiment crumble in recent weeks amid reports that it is seeking financial advisers.

One market source said those reports stoked concerns that the company may not be able to service its longer-term debt, and ratings agencies have concerns that its liquidity cushion - which is ample for the moment - will be worn away by cash burn.

Moody's said in March that it expects RadioShack to become "increasingly reliant on its unrestricted cash balances, as operating performance and free cash flow continue to deteriorate, resulting in reduced financial flexibility."

Moody's rates the credit at Caa1 with a negative outlook; S&P rates it at CCC+ with a negative outlook and Fitch rates it at CCC.

The company said in a filing that CFO Dorvin Lively had stepped down. CEO Joseph Magnacca, who took the post in February, is RadioShack's third chief executive in two years.

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