Shares of RadioShack Corporation (NASDAQOTH:RSHCQ) plunged by as much as 24% early Tuesday -- but not for the reason you might think.
Given both the drop's post-Cyber Monday timing and RadioShack's questionable holiday strategy, nobody would blame investors for wondering wonder whether it had suffered some catastrophic event over the important shopping event. But alas, it's still a bit too early to make that call.
So much for "constructive discussions"
Instead, RadioShack's latest plunge came courtesy of lenders Salus Capital Partners and Cerberus Business Finance, which in an SEC filing revealed on Monday served the beleaguered retailer with a notice of default and acceleration. Specifically, Salus is claiming breached covenants related to the $250 million term loan facility it extended to the Shack late last year, pointing to what RadioShack is calling "unfounded technical arguments" from a more recent cash-infusing lifeline from other investors.
Curiously, however, when RadioShack detailed that lifeline in early October, CEO Joe Magnacca also wrote, "[W]e are in constructive discussions with our term lenders, led by Salus Capital, toward additional steps to recapitalize RadioShack."
Of course, it's not as though RadioShack had much of a choice with its most recent infusion. Only weeks earlier, the company had stated without additional cash, it may not have had enough resources to fund operations "beyond the very near term," let alone through the crucial holiday season.
Nonetheless, the term lenders now want RadioShack to immediately pay back their $250 million with interest. And it doesn't take a rocket scientist to understand why RadioShack thinks that's a bad idea.
Between a Shack and a hard place
In fact, RadioShack even issued a press release on Tuesday defending itself, first reassuring investors that lenders holding the majority of its commitments under the asset-backed credit facility in question "intend to continue to extend credit" according to the terms of that ABL.
In addition, Magnacca reminded the market of the "meaningful steps" they've already taken in their turnaround in addition to October's recapitalization plan. Those steps include:
- An expected $35 million reduction in operating costs from reconfigured store hours at select locations
- $39 million in savings related to IT cost reductions and operational efficiency projects.
- Additional cost-reduction measures to be announced with RadioShack's upcoming earnings release, with which it thinks it can save an additional $200 million beyond the impact of existing store closures.
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