RadioShack stock

Credit: The Motley Fool

Shares of RadioShack Corporation (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.
Magnacca also reminded the market that RadioShack was denied permission by term lenders earlier this year to close up to 1,100 underperforming stores, which would have allowed it to focus on its core profitable locations -- that is, he elaborated, unless RadioShack "paid significant fees, prepaid a substantial portion of their debt, and agreed to other covenants and concessions that the Company believed to be unreasonable."
 
Instead, RadioShack could only close a maximum of 200 stores annually -- a term to which it reluctantly agreed to around this time last year in order to secure $835 million in equally crucial financing. At that rate, simple arithmetic shows RadioShack would have had to wait more than five years to reach its initial store closure goal.
 
Worse yet, when RadioShack requested in late October to close a smaller but still-significant portion of those same stores, the lenders again refused. Finally, RadioShack most recently repeated its 1,100 store request in order to provide "a rational store base going forward." According to Magnacca, however, that request has so far gone unanswered. 
 
"Wrong and self-serving"
So why would RadioShack's term lenders want to take this contentious route?
 
RadioShack, for its part, says it "believes these claims are wrong and self-serving," and nothing more than an attempt to "manufacture a problem during the critical Holiday shopping season in an effort to get out of a loan on which they have already reaped more than $35 million in fees and interest payments."
 
Even so, given their front-row seat to RadioShack's impending turnaround -- or lack thereof -- it's not exactly encouraging that these lenders want to get out of the loan in the first place. If one thing seems sure in the end, it's that if they succeed in legally forcing RadioShack to pay up, the company's already-real risk of bankruptcy will only be that much more likely.