On the eve of a crucial deadline to maintain solvency, RadioShack (NASDAQOTH:RSHCQ) seems to have found a savior.
RadioShack stock skyrocketed more than 25% Tuesday after The Wall Street Journal reported that lender Salus Capital has extended an unsolicited $500 million loan offer to the beleaguered electronics retailer.
It's no coincidence the offer is apparently good only until Thursday. As fellow Fool Adam Levine-Weinberg pointed out in October, RadioShack has until then to show it can maintain at least $100 million in liquidity under the conditions of another crucial financing package it secured at the time. As part of that package, orchestrators Standard General and Litespeed Management agreed not only to take over RadioShack's existing $585 million credit facility, but also to provide about $120 million in collateral to help the company keep its shelves stocked through the holiday season. If the retailer met certain terms -- including the $100 million liquidity requirement -- that $120 million would be converted to RadioShack stock, giving it much-needed breathing room to remain solvent while it focused on its ongoing turnaround.
Until today, that seemed an insurmountable task considering that RadioShack suffered an adjusted loss of more than $125 million last quarter alone, and had just $62.6 million in total liquidity as of Nov. 1, 2014.
Not so fast
However, there's a bit of a catch in this case. First, The Wall Street Journal's sources said Salus' offer is a debtor-in-possession loan, which is typically used to fund operations in bankruptcy, and meant to increase the lender's influence if RadioShack files for Chapter 11. The loan would also replace RadioShack's existing $585 million asset-backed credit line. Of RadioShack's total liquidity at the beginning of November, just $19.3 million was in the form of available credit under that facility.
In short, rather than trying to save RadioShack from the brink, it appears Salus Capital could just as easily be positioning itself for maximum leverage over the company's assets in a bankruptcy filing.
That wouldn't be entirely surprising, as just last month Salus served RadioShack with a notice of default commanding immediate repayment of a separate $250 million term loan facility opened in late 2013. Salus specifically claimed breach of contract stemming from what RadioShack later described as "unfounded technical arguments" surrounding -- you guessed it -- the cash-infusing lifeline it secured in October.
Faced with a potentially crippling repayment obligation, RadioShack at the time issued a press release calling Salus' claims "wrong and self-serving," and 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."
RadioShack also pointed out that Salus is one of the key term lenders that have repeatedly blocked the retailer's requests to accelerate closure of up to 1,100 underperforming stores. The company claims that, had it been allowed to expedite those closures, it would have increased overall EBITDA by roughly $83 million and created an additional $87 million in liquidity based on reduced and focused inventory levels. In that case, RadioShack could have potentially avoided its current predicament altogether -- at least temporarily.
In any case, I certainly wouldn't blame RadioShack for approaching Salus' $500 million loan offer with a healthy dose of skepticism. From an investment standpoint, that is precisely why I'm still perfectly happy observing RadioShack's struggles from the sidelines.