Tuesday, December 2, 2014

Why Did Salus Send Notice Of Default To RadioShack Yesterday? $RSH

A correspondent has a theory:

"They seem to be calling out the additional first lien money that SG put in as being in violation of the prohibition of additional borrowing, which may be appropriate since SG was trying to have it both ways, being in a first lien position until the company meets the conditions that would result in a conversion to equity.

The other two claims about changes in the definition of terms that make it more difficult to payback the 2L and tweaking the inventory calculation to expand the borrowing base seem like they ought to be pretty straightforward to resolve unless the language is highly ambiguous.

My take on this is the following. They had to wait 30 days for the event of default to cure which would have put them at 11/3, but they didn’t act at that point. Perhaps there have been on-going negotiations about paying down Salus or doing something else to get them to waive the event of default (and perhaps the prohibition on store closures) in the interim and Salus finally ran out of patience or concluded that no deal was possible. This might also explain why we haven’t seen a registration statement on the rights offering.

I also suspect that this is in part a bit of a very high end smash and grab job on the part of Salus. Perhaps it is just coincidence, but they have waited until more or less the moment of peak inventory to assert this claim and they have instructed BofA to send the balance of the Residual Deposit Account to Salus on a daily basis and they have started the clock on the Standstill Period with respect to their ability to take collateral enforcement action against the collateral. So in effect, they have pulled out the stopper at the bottom of the tub just as the rate of cash inflow is maxing out. Call it an involuntary liquidation of sorts, just as the holiday inventory is turning into cash in a big way.

The onus would now appear to be on RSH to get an injunction to stop this siphoning of cash out of the company."
A very interesting and contentious situation. The complicated capital structure has been a big problem for this company.

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