Thursday, December 18, 2014

RadioShack Zombie Kept Alive By Sellers Of Credit Default Swaps


If you've sold CDS on a company, you should try to make the company not default. And that's exactly what RadioShack's CDS writers did: “The sellers of the protection built up quite a large war chest, and it took a relatively small amount of money to keep the company going,” said Peter Tchir, a former credit-swaps trader who is now head of macro strategy at Brean Capital LLC in New York. “They have huge incentives to keep the company alive to not trigger the swaps.”

That provided RadioShack’s biggest shareholder, Standard General LP, a potential pool of lenders when it arranged the loans in October. The financing gave the retailer enough cash to stock up for the holiday season while negotiating with other creditors that are blocking a plan to close underperforming stores.

The CDS writers made a lot of money selling CDS, and get to keep it if RadioShack doesn't default before their CDS expires. So they used some of that money to subsidize a loan to RadioShack to keep it afloat.


Stagflationary Mark said...

Retail, Leisure, and Hospitalilty Career Outlook (Musical Tribute)

The following chart shows the 10-year moving average of retail, leisure, and hospitality employment as a percentage of the population.

CP said...

That has the makings of a failed parabolic trend?

Stagflationary Mark said...

If you look closely, the trend failed during the Great Recession and we're attempting to recover.

As seen in the following chart, we are currently making excellent progress getting back to the parabola.

YoY Change

We won't stay above 0% forever though. Who knows what's going to happen in the next recession.

Further, even if we do make it back to the parabola, the long-term outlook looks horrible.

We were getting a tailwind in the 1980s and 1990s (riding the parabola up). Looks like a headwind from here (riding the parabola down).

Stagflationary Mark said...

I wonder how many marginal retail stores and restaurants are barely holding on right now.

"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffet

The tide isn't even out yet and RadioShack seems very exposed. Sigh.

Stagflationary Mark said...

One more important point.

Every parabolic economic trend is guaranteed to fail. Every single one of them.

How they fail is open for debate.

Put another way, economic stability cannot be found in an economic parabola. It's not mathematically possible.

Take the parabola within the link I offered for example. It cannot continue forever. At the very least, it will fall to 0%. Since it is impossible to have a negative number of employees working in retail, leisure, and hospitality, the trend must fail at that point.

In reality, it will obviously fail much sooner than that, one way or another.

CP said...

Parabolic Theory

No parabolic trend will continue forever.

Stagflationary Mark said...


George Soros can spot an unsustainable parabola much, much better than Jim Rogers can.

May 26, 2008
George Soros: rocketing oil price is a bubble

"Speculation... is increasingly affecting the price," he said. "The price has this parabolic shape which is characteristic of bubbles," he said.

Rob Dawg said...

I thought everyone knew RSH was in run off mode and only operating through the holiday season.