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
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
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.