July 11, 2013 9:08 pm

RadioShack seeks out financial advisor pitches as earnings erode, cash burn concerns mount

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RadioShack plans to entertain pitches for a financial advisor in the coming weeks, said two sources close to the matter and five advisory sources. Shops with capital markets capabilities and marquee restructuring practices are among the firms already invited to participate in the process, three of the sources specified.

The move to hire a banker to explore a balance sheet fix comes as the struggling electronics retailer faces a string of maturities, escalating cash burn and bloated inventory levels, the sources said. RadioShack first engaged AlixPartners for operational help over a year ago, as previously reported by Debtwire.

A company spokesperson declined to comment on the current search for an FA but did confirm that AlixPartners assists the retailer with inventory and distribution optimization. An AlixPartners representative declined comment on the engagement.

Most pressing on the capital structure front, the stressed borrower faces the 1 August 2013 maturity of its USD 216m 2.5% convertible notes. In 1Q13, RadioShack chipped away at the obligation by repurchasing USD 70.5m of the notes with cash on hand. Back in 3Q12, the issuer inked a USD 100m 11% second lien term loan due 2017 and a USD 50m Libor+ 450bps TL due 2016, both with agent Wells Fargo, to partially buy back USD 88m of the converts.

While management has telegraphed it has the resources to address the convert, liquidity is a precious commodity given RadioShack’s cash burn trajectory. At 1Q13 ended 31 March, the issuer held USD 434.3m of unrestricted cash and had USD 384.9m available under its USD 450m asset based revolver due 2016, according to SEC filings.

The Texas-based chain has been the subject of investor scrutiny as it combats margin pressure due to increased competition from online retailer Amazon and big-box heavy hitter Wal-Mart, the sources agreed.

During 1Q13, RadioShack’s revenue skidded 7% year-over-year to USD 849m, underpinned by a 5.7% decline in same store sales. For the three-month period, EBITDA slipped to USD 5m from USD 30m generated in the prior year period, noted a sellsider.

At quarter-end, the issuer’s net leverage catapulted to 7.3x from 0.7x during the prior year period, the sellsider continued. Meanwhile, the electronics seller carries gross leverage of 18.7x based on LTM EBITDA of USD 38m and debt of USD 712m.

For FY13, the issuer is projected to book negative USD 5m of EBITDA, falling far short of the USD 63m recorded in FY12, the sellisder said. By comparison, the store franchise generated north of USD 260m in FY11. More bearish investors peg FY13 EBITDA at negative USD 25m and capital expenditures at USD 70m, added a buysider.

While cash burn is a near certainty, projections on the magnitude vary greatly based on vastly different expectations for working capital use. The company has burned USD 230m of cash over the LTM period, which incorporates USD 149m of working capital use. But if holiday receivables dramatically decrease working capital to the USD 2m mark, cash burn would ease to USD 120m for FY13, assuming USD 47m of cash interest, USD 1m of cash taxes, and USD 65m of capital expenditure, a sellside source concluded.

During its most recent earnings call, management indicated it also has a few liquidity triggers to pull, including a net working capital benefit of USD 65m from ending its mobile phone partnership with Target. The company also said it has a USD 50m tax receivable that it expects to collect this year.

RadioShack’s converts due in August are quoted at around par, said one of the sources. The company’s USD 325m 6.75% unsecured notes due 2019 last changed hands at 73.25 to yield 13.52%, down from around 80 in late May, according to MarketAxess.

Five-year CDS on the name is quoted at 22/23.5 points upfront, the buysider pointed out.

The company’s stock traded at USD 2.90 this afternoon, giving the company a USD 289m market capitalization.


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