Moody's Cuts RadioShack (RSH) CFR from B3 to Caa1, Outlook Negative
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Moody's Investors Service today downgraded RadioShack Corporation's (NYSE: RSH) corporate family rating to Caa1 from B3 and probability of default rating to Caa1-PD from B3-PD. In addition, the ratings for RadioShack's senior unsecured convertible notes and senior unsecured notes were downgraded to Caa2 from Caa1. The ratings outlook remains negative. RadioShack's SGL-1 Speculative Grade Liquidity assessment is affirmed.
"The continuing negative trend in RadioShack's sales and margins has resulted in a precipitous drop in profitability as its business mix is skewed towards the highly competitive mobility business and low margin smart phones causing continued deterioration in credit metrics", Mickey Chadha, Senior Analyst at Moody's said. "Additionally, we believe sales of RadioShack's consumer electronics segment which includes products like GPS, cameras and music players continue to shrink due to cannibalization from multi-use smart phones which has further exacerbated the decline in profitability", Chadha further stated.
RATINGS RATIONALE
RadioShack's Caa1 Corporate Family Rating reflects Moody's opinion that the overall business strategy of the company to reverse the decline in profitability has not gained any traction. Moody's expects that the 2013 retail operating environment will remain challenging and the increasing price competition within the wireless mobility sector including wireless carriers will continue to pressure RadioShack's profits. The rating also reflects the company's increasing reliance on its low margin mobility business resulting in margin erosion and weak credit metrics -- fiscal 2012 Mooody's adjusted debt/EBITDA and EBITA/interest is 9.5 times and 0.3 times respectively, its vulnerability to product renewal cycles, product volatility driven by price competition from a variety of retail formats, small store size with the constant need to re-balance product mix and obsolescence risk inherent in consumer technology. The Rating is supported by RadioShack's very good liquidity profile, and its selection of price-competitive national and private label products. The company's breadth of peripherals for digital and audio-visual products, which often require high-touch sales efforts, helps differentiate it from big-box stores.
Although near term debt maturity concerns are mitigated by the company's high cash balance which is more than enough to pay off the remaining $287 million convertible notes due August 2013, Moody's expects the company to be increasingly reliant on its unrestricted cash balances as operating performance and free cash flow continues to deteriorate resulting in reduced financial flexibility. The company purchased and retired $88 million of the convertible notes in fiscal 2012. While there still remains very good availability under the company's ABL revolving credit facility, there has been a $56 million contractual reduction in availability under the ABL as the company did not meet a specified consolidated fixed charge coverage ratio during the fiscal year ending 2012.
The following ratings are downgraded and point estimates updated:
Corporate Family Rating to Caa1 from B3
Probability of Default Rating to Caa1-PD from B3-PD
$287 million senior unsecured convertible notes due August 2013 to Caa2 (LGD5, 77%) from Caa1 (LGD 5, 72%)
$325 million senior unsecured notes due May 2019 to Caa2 (LGD5, 77%) from Caa1 (LGD 5, 72%)
The negative outlook reflects the uncertainty regarding the company's ability to improve its operating performance in the next 12 months and our expectation that RadioShack's ongoing lackluster operating performance and margin erosion will likely continue and credit metrics will remain weak in the near to medium term.
Given the negative outlook and the steep decline in the company's operating performance and profitability, upward movement in RadioShack's ratings is unlikely in the near to medium term. Stabilization of the outlook will require sustained improvement in operating margins and absence of any further operating missteps. Stabilization of the outlook will also require good liquidity, and EBITDA demonstrating tangible incremental progress toward a level that would result in debt/EBITDA being sustained below 6.5 times and EBITA to interest being sustained above 1.0 times.
In the longer term a higher rating will require no deterioration in liquidity, sustained positive comparable store sales growth and improvements in operating margins and profitability such that debt / EBITDA is sustained below 6.0 times and EBITA to interest is sustained above 1.5 times.
The failure of the company to reverse the sequential quarterly decline in EBITDA and earnings will lead to a downgrade. Ratings could also be downgraded due any deterioration in liquidity. Ratings could be downgraded if there is no improvement in credit metrics in the near to medium term.
The principal methodology used in this rating was the Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
"The continuing negative trend in RadioShack's sales and margins has resulted in a precipitous drop in profitability as its business mix is skewed towards the highly competitive mobility business and low margin smart phones causing continued deterioration in credit metrics", Mickey Chadha, Senior Analyst at Moody's said. "Additionally, we believe sales of RadioShack's consumer electronics segment which includes products like GPS, cameras and music players continue to shrink due to cannibalization from multi-use smart phones which has further exacerbated the decline in profitability", Chadha further stated.
RATINGS RATIONALE
RadioShack's Caa1 Corporate Family Rating reflects Moody's opinion that the overall business strategy of the company to reverse the decline in profitability has not gained any traction. Moody's expects that the 2013 retail operating environment will remain challenging and the increasing price competition within the wireless mobility sector including wireless carriers will continue to pressure RadioShack's profits. The rating also reflects the company's increasing reliance on its low margin mobility business resulting in margin erosion and weak credit metrics -- fiscal 2012 Mooody's adjusted debt/EBITDA and EBITA/interest is 9.5 times and 0.3 times respectively, its vulnerability to product renewal cycles, product volatility driven by price competition from a variety of retail formats, small store size with the constant need to re-balance product mix and obsolescence risk inherent in consumer technology. The Rating is supported by RadioShack's very good liquidity profile, and its selection of price-competitive national and private label products. The company's breadth of peripherals for digital and audio-visual products, which often require high-touch sales efforts, helps differentiate it from big-box stores.
Although near term debt maturity concerns are mitigated by the company's high cash balance which is more than enough to pay off the remaining $287 million convertible notes due August 2013, Moody's expects the company to be increasingly reliant on its unrestricted cash balances as operating performance and free cash flow continues to deteriorate resulting in reduced financial flexibility. The company purchased and retired $88 million of the convertible notes in fiscal 2012. While there still remains very good availability under the company's ABL revolving credit facility, there has been a $56 million contractual reduction in availability under the ABL as the company did not meet a specified consolidated fixed charge coverage ratio during the fiscal year ending 2012.
The following ratings are downgraded and point estimates updated:
Corporate Family Rating to Caa1 from B3
Probability of Default Rating to Caa1-PD from B3-PD
$287 million senior unsecured convertible notes due August 2013 to Caa2 (LGD5, 77%) from Caa1 (LGD 5, 72%)
$325 million senior unsecured notes due May 2019 to Caa2 (LGD5, 77%) from Caa1 (LGD 5, 72%)
The negative outlook reflects the uncertainty regarding the company's ability to improve its operating performance in the next 12 months and our expectation that RadioShack's ongoing lackluster operating performance and margin erosion will likely continue and credit metrics will remain weak in the near to medium term.
Given the negative outlook and the steep decline in the company's operating performance and profitability, upward movement in RadioShack's ratings is unlikely in the near to medium term. Stabilization of the outlook will require sustained improvement in operating margins and absence of any further operating missteps. Stabilization of the outlook will also require good liquidity, and EBITDA demonstrating tangible incremental progress toward a level that would result in debt/EBITDA being sustained below 6.5 times and EBITA to interest being sustained above 1.0 times.
In the longer term a higher rating will require no deterioration in liquidity, sustained positive comparable store sales growth and improvements in operating margins and profitability such that debt / EBITDA is sustained below 6.0 times and EBITA to interest is sustained above 1.5 times.
The failure of the company to reverse the sequential quarterly decline in EBITDA and earnings will lead to a downgrade. Ratings could also be downgraded due any deterioration in liquidity. Ratings could be downgraded if there is no improvement in credit metrics in the near to medium term.
The principal methodology used in this rating was the Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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