Radioshack stuck in phone downgrade cycle

Derivatives traders are signaling RadioShack is headed toward default as the electronics retailer finds itself cornered into the low-margin mobile phone business.

Credit-default swaps linked to RadioShack's debt imply the the market perceives it as C rated, according to Moody's's capital markets research group, which means investors have "little prospect for recovery of principal or interest." The Fort Worth, Texas-based electronics chain, rated B3, is poised for its fourth downgrade in a year, data compiled by Bloomberg show.

While RadioShack has enough cash to retire the rest of a $375 million convertible bond issue that matures in August after repurchasing $88 million of the securities in the third quarter, competition for electronic products from televisions to cable connectors from online and discount retailers such as Amazon.com to Wal-Mart Stores is pushing margins close to a 15- year low. That leaves RadioShack, along with rivals such as Best Buy, stuck with thin-margin mobile phones for revenue.

"Smartphones are cannibalizing their sales," Manoj Chadha, a senior analyst in Moody's Investors Service corporate finance group in New York, said in a telephone interview.

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