Derivatives linked to RadioShack Corp. debt imply the retailer has an 84 percent chance of default within five years, a level Eastman Kodak Co. and AMR Corp. reached within six months of filing bankruptcy protection.
Credit-default swaps on the Fort Worth, Texas-based electronics chain’s debt have been rising since January, when they indicated a 50 percent default risk, jumping after the company reported a second-quarter loss last week. Kodak hit the 84 percent level on July 18, 2011, six months before it filed.
RadioShack is focusing on mobile phones, which appeal to “very price-sensitive consumers,” according to Bonnie Baha, head of global developed credit at Los Angeles-based DoubleLine Capital LP, which oversees $40 billion. “When you have a consumer who is very dependent on price, with low margins, it’s tough to manage a business and grow to prosperity,” she said.
RadioShack’s $324.8 million of 6.75 percent notes due May 2019 have dropped 9.5 cents on the dollar since July 25, when the company reported a quarterly adjusted loss of 20 cents a share, compared with the average analyst estimate projecting a profit of 4 cents, according to data compiled by Bloomberg.
Selling more smartphones, including Apple Inc.’s iPhone, contributed to the decline in gross margin. It will continue to pressure margins in the third quarter and “to a lesser extent” the fourth, Gooch said in a conference call to discuss the quarterly results with analysts and investors that day.