RadioShack results push its bonds to default zone

Plummeting earnings and store closures pushed Moody's to warn investors about RadioShack bonds.
Plummeting earnings and store closures pushed Moody's to warn investors about RadioShack bonds. Bloomberg News

New York - After reporting its worst quarterly sales drop in almost 15 years, RadioShack is as good as defaulted in the eyes of credit investors, according to Moody's Corp.'s capital markets research group.

Revenue fell 28 percent in the fourth quarter to $935.4 million, the most since a 29 percent plunge in the first quarter of 1999, data compiled by Bloomberg show. The retailer's credit-default swap and bond prices have reached levels implying its debt should be rated C, indicating obligations that are "typically in default, with little prospect for recovery of principal or interest," Moody's definitions show.

RadioShack, which is closing as many as 1,100 of its more than 5,000 stores, is combating technology that's evolving faster than its marketing strategy, while facing competition from online retailers such as Amazon.com Inc. and big-box stores including Best Buy Co. The combination has eroded the Fort Worth, Texas-based company's cash to the lowest level since 2006 after it reported results for the fourth quarter, typically the most profitable period for retailers.

"Cash is going in the wrong direction in what should be a cash-producing quarter," James Goldstein, an analyst at CreditSights Inc. who rates the company's bonds "underperform," said in a telephone interview. "I'm not really sure the market needs a RadioShack."

The company's $324.8 million of 6.75 percent notes due May 2019 dropped 9.75 cents to 56.25 cents on the dollar Tuesday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The 21 percent yield is more than three times the 5.5 percent average for companies in the Bloomberg High Yield Corporate Bond index.

The cost to protect RadioShack's debt from default jumped Tuesday to the most ever for one- and five-year contracts, according to data provider CMA.

Five-year credit-default swaps tied to RadioShack's debt surged 7.7 percentage points to 45 percent upfront, according to CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. That's in addition to 5 percent a year, meaning it would cost $4.5 million initially and $500,000 annually to protect $10 million of RadioShack's debt.

The one-year contracts doubled to 16.7 percent upfront. Credit swaps, which typically rise as investor confidence deteriorates and fall as it improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

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