Usually, we’d expect a company’s shares to fall when it warns that it could be heading for bankruptcy, shares fall. Not RadioShack (RSH). Its shares have surged nearly 20% this morning after it warned that it was running out of cash and could be forced to file.
From RadioShack’s 10-Q:
Given our negative cash flows from operations and in order to meet our expected cash needs for the next twelve months and over the longer term, we will be required to obtain additional liquidity sources, consolidate our store base and possibly restructure our debt and other obligations. We are exploring alternatives and are engaged in discussions with third parties as well as our key financial stakeholders, including our existing lenders, bondholders, shareholders and landlords, in an effort to create a long-term solution. Alternatives include the sale of the company, partnership through a recapitalization and investment agreement, as well as both in and out-of-court restructuring. We presently anticipate announcing a recapitalization alternative, in the near term, which may be our most likely course of action, but we are continuing to evaluate all of our alternatives to restructure existing debt terms and other arrangements to provide additional liquidity. There can be no assurance that we will be able to successfully implement a long-term solution.
If acceptable terms of a sale or partnership or out-of court restructuring cannot be accomplished, we may not have enough cash and working capital to fund our operations beyond the very near term, which raises substantial doubt about our ability to continue as a going concern. As a result, we may be required to seek to implement an in-court proceeding under Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code"). If we commence a voluntary Chapter 11 bankruptcy case, we will attempt to arrange a "pre-packaged" or "pre-arranged" bankruptcy filing. In a "pre-packaged bankruptcy", we would make arrangements with new and existing creditors for additional liquidity facilities and the restructuring of our existing debt terms, before presenting these arrangements to the bankruptcy court for approval. In the absence of a "pre-packaged" bankruptcy, we would consider a "prearranged" bankruptcy filing, in which we would reach agreement on the material terms of a plan of reorganization with key creditors prior to the commencement of the bankruptcy case. An in-court restructuring proceeding would cause a default on our debt with our current lenders.
You can’t get any more explicit than that. So why are RadioShack’s shares surging? Consider its 10-Q a warning to involved parties to involved parties to get to the negotiating table and get a deal done. Or else.
Janney’s David Strasser and team consider RadioShack’s predicament:
All options are on the table, including debt restructuring, store consolidation/rationalization, and significant cost reductions. However, to avoid bankruptcy, or even to orchestrate some sort of prepackaged bankruptcy, RadioShack needs support from lenders, vendors, shareholders, and landlords. Before this can happen, the company needs to show stabilization, at a time that product cycles are going against it and the economy continues to challenge its core customer. We worry that in its current financial position, the company will struggle to get key product this holiday. For example, we struggle to see a scenario where RadioShack will get iPhone6, with what could be a challenging get for even top retailers like Best Buy (BBY), as Apple (AAPL) more aggressively tries to balance allocation between China and US. A smaller store base could help, but that is going to be expensive, or more likely something that will further accelerate a move into bankruptcy. We see numerous challenges continuing, but ultimately, we believe that it will be tough to get inventory this holiday, as vendors are skittish about getting paid.
After being up nearly 18% earlier today, shares of RadioShack have gained 6.3% to 99 cents at 3:22 p.m. Apple is little changed at $101.05 and Best Buy has advanced 0.3% at $32.42.
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