RadioShack's Bondholders Are Holding It Hostage

RadioShack's bondholders are holding it hostage.

On May 8, the company announced that its lenders rejected a plan to close up to 1,100 stores. On its first quarter earnings conference call, the company said it will close 200 stores per year instead.

Yesterday, S&P cut its rating on RadioShack's debt, saying it expects the company's operating results to remain weak. On June 11, ratings firm Fitch also lowered its rating on RadioShack's debt, saying that as its liquidity dwindles, the retailer's options are becoming limited.

As of May 3, RadioShack's cash and cash equivalents totaled $61.8 million, compared to $109.6 million on February 1. That's a steep drawdown in just three months.

On its earnings conference call, RadioShack's CFO John Feray said the company continues, "to have a strong, productive, and positive relationship with our lenders and more specifically a good dialogue on this topic."

But the reality is that the company's lenders are forcing it into bankruptcy.

Michael Lasser, an analyst at UBS, asked the company on its conference call what the sticking points are between RadioShack and its lenders that created the disconnect on store closures. RadioShack declined to get into details beyond saying the terms, "were just not mutually agreeable at the present time."

RadioShack's real estate problem is that it owns none of its stores. According to its , RadioShack leases all of its retail square footage. Breaking leases can be expensive, and it's clearly something the company's lenders do not want to pay for.

On the Q1 earnings conference call, RadioShack CEO Joe Magnacca said the company's earlier intentions to close 1,100 stores, "wasn't drawing a line in terms of profitability of stores to get to 1,100 leaving another 3,000 open, it was more about taking a much more strategic view of our real estate and getting to a place sooner than later."

In essence, RadioShack wanted to just "get it over with," break some leases, and close a bunch of stores.

By not agreeing to the company's store closure plans, RadioShack's lenders are betting they can recoup money they might've lost on broken leases in bankruptcy court.

RadioShack's previous store closure plans were a signal the company just wanted to eat the cost of breaking some lease agreements to stop bleeding cash.

And its lenders said: "No."