Friday, October 10, 2014

Radio Shack Case Study

Excellent post by howardroark at Motley Fool forums:

"Salus is blocking the fire escape. Why?

Well, I promise you it is not because Salus is extremely optimistic that Furby II is about to turn the clock back on those 1100 stores to 1986. I can really only think of two reasons to stand in the way. One, $250 million is kind of a big deal to a not-enormous shop like Salus who only has $724 million in total ABL in its portfolio (they are majority owned by HRG, which reports as a public company). When they did the deal, the stock was a $2.50-$3.00, and more importantly the $324 million in 2019 unsecureds below them was at 70c. The point being, things very quickly turned worse just a few months later when they missed estimates by a country mile and the unsecured fell to 45c. So maybe Salus just saw a chance to play chicken by withholding its consent to an obviously beneficial decision to either get more fees, or more likely to get a chunk of the liquidation proceeds to pay down some of the term loan.

It may secondarily be true that store liquidations are asymmetrically worrisome for Salus. Normally the senior secured won't ferociously stand in the way (maybe just some nominal extortion) of desperately needed retrenching, because to the extent stores are liquidated and inventory is sold the borrowing base availability declines. With that decline the retailer is basically forced to pay down the ABL anyway. But here where Salus is holding a junior lien on the inventory and already fully extended, less inventory without paydown is a negative credit event for them if the Company burns the proceeds. It is also a negative credit event to the extent the closures include some payouts to landlords who are otherwise junior to Salus."

1 comment:

MrGotham said...

It is abundantly clear that there is a shortage of good collateral for both the first and second lien paper (hence the reserves by GE against the borrowing base when they owned the loan that was recently sold to Standard General).

Given that, the only two rational responses for Salus are 1) liquidate the company or 2) force the company to add more collateral in a position junior to them before they relent on the ability to close stores. Hence the stalemate, the company doesn't want to liquidate and every store closing dilutes Salus' collateral position (since store inventory proceeds are usually consumed by lease expenses.)

Salus is better off with the company in BK and the landlords taking a significant share of the liability cram down.