On Monday, asset manager and mid-market financier Salus Capital threw RadioShack Corp. (RSH) yet-another lifeline, in the form of a $500 million loan offer that will keep the company afloat for at least a little while longer.
It remains to be seen if the drowning retailer will actually reach out and grab it; the company has until Thursday to decide.
To put it bluntly, though, any owners of RadioShack stock that are weighing the pros and cons of the Salus offer aren’t asking themselves a more important question — does Salus Capital seriously not see RadioShack is a lost cause and can’t be saved? Why would it continue to prop up this lost cause?
The answer is best illustrated by the premise of one of 1989’s cult-classic films.
It’s Another Weekend at Bernie’s
It’s difficult to imagine director Ted Kotcheff thinking back in 1989 that his film Weekend at Bernie’s was going to remain a much-loved and still-relevant movie in 2015. The critics were lukewarm on it when first released, and the total domestic box-office take of $30 million was mediocre even by 1989 standards. Yet, here we are 26 years later, using it to draw an analogy investors can understand.
On the off-chance you’re not familiar with the flick, the premise of Weekend at Bernie’s is simple enough … young insurance company employees Richard (Jonathan Silverman) and Larry (Andrew McCarthy) are invited by their successful and affluent boss, Bernie Lomax (Terry Kiser), to stay at his house in the Hamptons for a weekend. Larry and Richard are certain the social engagement will lead to promotions for both of them, but their excitement fades when upon their arrival they alone find Bernie has been murdered.
Unless the pair can convince everyone else Bernie is still alive, the assassin will end their young lives too. (The “why” is too complex to discuss here.) The highjinks begin immediately, with the two young men carrying the flopping deceased body arm-in-arm (in-arm) around through the weekend until they’re sure they’re safe again.
What does any of this have to do with RadioShack?
In simplest terms, RadioShack is Bernie, and Salus Capital is playing the roles of Larry and Richard. That is to say, Salus knows — or should know — RadioShack is dead and that they’re simply throwing money at a corpse, knowing it can’t be saved, but needing to convince the company that it still has faith in the turnaround effort.
RSH is DOA
While the headlines suggest a long-standing problem (a lack of liquidity) for RadioShack could be solved by the $500 million loan, it’s a back-handed offer that in some ways acknowledges RadioShack stock is just as dead as Bernie Lomax.
Specifically, the loan offer is a bankruptcy-specific financing intended to get through a Chapter 11 restructuring if the retailer decides to go that route. They’re called debtor-in-possession loans, and, lo and behold, this one would just happen to allow Salus Capital control how any bankruptcy would proceed. It’s not exactly a vote of confidence in the company.
Of course, Salus Capital has to know the struggling electronics retailer posted an eleventh straight quarter of losses in December. Salus also has to realize RadioShack didn’t do anything spectacular enough in the all-important November/December shopping season to reverse its fortunes. What little cash or credit RadioShack had at the end of Q3 — about $30 million — should effectively be gone now, meaning the electronics retailer is now out of options.
Why else would Salus make such an offer, when it has got other financing options — ones that don’t say, “we’re confident you’re going bankrupt?”
But, wait! Didn’t hedge fund Standard General come to the rescue in October by taking over RadioShack’s $585 million credit facility, improving its financial flexibility?
It was technically a rescue, though also a somewhat raw deal. The company has to maintain liquidity of $100 million or more to fulfill the terms of the loan and convert $120 million worth of Standard General-supplied collateral into RSH stock. Otherwise, Standard General’s loan remains a loan that RadioShack will almost certainly be unable to repay.
Some believe that the offer to refinance the October loan is a sign that RadioShack won’t be able to meet its liquidity requirement established by Standard General.
Whether it’s Salus or Standard General may not really matter, however. RadioShack is now swimming with the legalized loan sharks, either of which will eventually eat it, barring a miraculous rebound in the retailer’s business.
RadioShack Stock Still Isn’t a Buy
So why, pray tell, would Salus Capital be interested in funding a lost cause? Money, for one. Salus collects fees and interest payments for its loans. But, that may not be the primary reason Salus is so interested in RadioShack now.
As a reminder, Salus was the same outfit that in December claimed RadioShack had technically defaulted on its loan covenants. It was a self-serving claim, however, as Salus also stood to make a small fortune via their credit default swap wagers that would only pay if RadioShack defaulted on their loans.
It was a contentious claim though, and the International Swaps and Derivatives Association was brought in to arbitrate the argument. The ISDA decided that RadioShack had not defaulted. Therefore, Salus Capital didn’t score a big windfall on its credit default swap agreements.
Still, why would Salus be willing to refinance a company it clearly believes has already defaulted, and presumably has to believe is capable of defaulting in the future? It’s not public information, but one can assume Salus is still betting the company defaults on its loans.
Salus already cried “default” in December, but that tactic didn’t fly. By being the debtor-in-possession, though, Salus may actually be able to accelerate a default by using its sway granted by the loan terms. The fact that it will be in the driver’s seat of any bankruptcy is just a bonus.
So yes, Salus is sending a mixed message, by wanting to lend to a company it expects to file bankruptcy.
None of this is to say Standard General or any other hedge fund, private equity group, or business development company wouldn’t do the same as Salus if given the opportunity. For what it’s worth, however, Standard General along with another lender, Litespeed Management, collectively own about 16% of all RadioShack stock, and as such actually have a stake in the company’s success. Salus Capital, on the other hand, owns no stake in RadioShack stock, underscoring how it has no real vested interest in the retailer’s survival.
Of course, none of the details at this point really matter to anyone who owns RadioShack stock. What matters now is that the vultures are circling, smelling death. They’re just jockeying for prime feasting-position once the looming bankruptcy becomes official.
The irony is, much like Larry and Richard did with Bernie Lomax for an entire weekend, Salus must act as if it really believes RadioShack still has a prayer of a turnaround, knowing the whole time it doesn’t.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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