RadioShack disclosed that it received a notice from one of its lenders, Salus Capital Partners, claiming that the retailer had breached covenants on a $250 million term loan.
The retailer asserted that the Salus accusations are “wrong and self-serving” and that it will “vigorously contest these claims.” The claims relate primarily to a recapitalization and investment agreement made on Oct. 3, 2014.
RadioShack entered the agreement with a consortium led by Standard General LP in an effort to restructure debt prior to the 2014 holiday season. The retailer indicated in an SEC regulatory filing in September that it “may not have enough cash and working capital to fund [its] operations beyond the very near term.” Barring a sale, partnership or restructuring, the company stated it would have been required to file for Chapter 11 bankruptcy.
Standard Capital, already owning 10% of RadioShack stock, offered the retailer a $120 million rescue package as part of the refinancing. Under that deal, the hedge fund would gain control of RadioShack if the retailer worked out a new contract with a supplier and had at least $100 million in cash or borrowing capacity by January 2015.
Due to RadioShack’s procurement of this separate credit line, Salus Capital Partners has accused the retailer of defaulting the existing credit agreement made between the companies in 2013.
During the negotiations, Salus Capital Partners and co-lender Cerberus Business Management did not approve RadioShack’s attempt to close 1,100 stores in May. The lenders sought additional fees and prepayment on a portion of the loan prior to approving any store closings.
After securing the loan from Standard General, RadioShack requested that the term lenders consent to the closure of a smaller portion of stores, but was again denied. The retailer followed up with another request to shutter up to 1,100 stores, but hasn’t received approval.
“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,” said Joe Magnacca, CEO of RadioShack. “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.”
RadioShack is presently undergoing a brand transformation in an effort to turn around its business. The retailer has reconfigured store hours at select locations to reduce annual operating costs by $35 million. The company also has completed additional cost reduction projects that have saved more than $39 million.
In the statement, RadioShack affirmed it will announce further cost-cutting measures in its upcoming quarterly earnings release that are estimated to save $200 million beyond the impact of the suggested store closings.