Tablet Business

RadioShack says lender invented allegations that it breached loan covenants

RadioShack came out punching Tuesday, and the target of its right hooks and uppercuts was not Best Buy or Fry’s but one of its own creditors — Salus Capital Partners, a hard-knuckle lender of last resort to struggling retailers, which is demanding all of its money back.

The Fort Worth-based retailer, which arranged a crucial refinancing in October to avoid a bankruptcy filing, said it had received a notice from Salus, a unit of Harbinger Group, claiming that the deal violated terms of its $250 million loan.

In a letter including with a Securities and Exchange Commission filing, Salus said loan convenants were violated when RadioShack entered into the new financial agreements with hedge funds in recent months. It asked Bank of America to send over all the funds in one of RadioShack’s accounts.

But RadioShack said it would “vigorously contest” the claims, alleging that Salus had invented allegations that the retailer violated the loan terms and was acting in “narrow self-interest.” It accused Salus of trying to thwart its turnaround plan and called its actions “wrong and self-serving.”

Trading in RadioShack shares (ticker: RSH) was halted for several hours after the news release but then dropped 6 cents, or nearly 9 percent, to close at 72 cents.

“When you lie with dogs you get fleas,” Anthony Chukumba, an analyst at BB&T Capital Markets in New York, told Bloomberg News. He said the “lenders of last resort” are looking to protect their investment now that RadioShack is looking to recapitalize. “They are trying to take their pound of flesh,” he said.

Whatever the merits of the two sides’ arguments, analyst Michael Pachter of Wedbush Securities said Salus apparently believes that RadioShack is on the ropes and is trying to force the company into bankruptcy. Pachter believes that the chain is headed toward Chapter 11 reorganization despite new and competent management “who landed on the Titanic after it already had struck an iceberg.”

Pachter is not alone.

“Salus is attempting to force the company’s hand before the important holiday season and perhaps accelerate a bankruptcy filing, which we see as being inevitable in the near future and continue to believe it is the best option for the company to restructure its operations,” analysts at Janney Capital Markets said in a note.

The October refinancing was led by Standard General, a New York hedge fund that is also a major shareholder of RadioShack. In September, after reporting a $137.4 million second-quarter loss, RadioShack warned that it might need to file for bankruptcy if it couldn’t secure new funding.

In a strongly worded statement on Tuesday, RadioShack CEO Joe Magnacca all but accused Salus of trying to sabotage efforts to make the consumer electronics chain profitable again, and of doing it during the crucial holiday season.

“Despite their intimate knowledge of the challenges that RadioShack faced when they extended credit to us late last year, our current term lenders have repeatedly blocked our efforts to accelerate and intensify our turnaround and make smart decisions for our business,” Magnacca said.

“Now, prompted by their narrow self-interest, they appear to be trying to manufacture a problem during the critical holiday shopping season in an effort to get out of a loan on which they have already reaped more than $35 million in fees and interest payments.

“We intend to do everything in our power to prevent them from using what we see as unfounded technical arguments to benefit unjustly at the expense of other creditors, the hundreds of communities we serve, the many other businesses we support and the jobs of more than 25,000 hard-working people,” the CEO added.

Lenders including Salus blocked a company plan this year to close as many as 1,100 underperforming RadioShack stores to trim costs. The company said lenders have continued to oppose the store closings, including a renewed request made since the recent refinancing.

“It appears to us that the term lenders seek only to advance their particular interests at the expense of all other RadioShack stakeholders and will oppose any common sense business move requiring their consent unless the Company agrees to their exorbitant demands,” Magnacca said. “The Company calls on them to rescind their notice and related demands and instead grant approval for the Company to take action that would benefit all creditors and other stakeholders.”

This report includes material from Bloomberg News.