Last week Radioshack’s prepetition lender Salus Capital Partners pushed for the electronics chain to convert its Chapter 11 bankruptcy case to Chapter 7.
Chapter 11 fees mounting
As it calculates the likely results from liquidation of the debtor, Salus Capital is apparently ready to cut its losses and push the company toward Chapter 7. Salus Capital reports that the professional fees accrued during the bankruptcy are already exorbitant, and that Radioshack has sold most of its assets, meaning that there is no benefit to it remaining in Chapter 11 liquidation. The lender alleged that Radioshack is insolvent because it owes more than $600 million to bondholders, landlords and suppliers for its 4,000 retail locations. Furthermore, the retailer is expected to accrue close to $45 million in legal fees and operating losses.
The final hearing is set for this week, however Radioshack has reported that its Chapter 11 restructuring plan will be finalized by July 22, which further complicates the case. In the proposal, Radioshack would set up a trust enabling secured lenders to pursue litigation claims for unpaid bills.
The case against Salus Capital
Radioshack’s lawyers have alleged that Salus Capital has taken cash out of the company for professional fees, further sending the retailer into staggering debt. Therefore, if the company is pushed into Chapter 7 bankruptcy, Salus would effectively walk away from its own share of the $39 million in debt. The move would also allow Salus to install a trustee to replace Radioshack’s legal and advisory teams, thereby negating the company’s debt restructuring plan.
The debt restructuring plan
RadioShack filed an objection to Salus Capital’s move for a conversion to Chapter 7 early on June 22. In the objection, Radioshack claimed that the company has met all scheduled debt obligations for Salus Capital and other senior bondholders. Therefore, it argued, a move to Chapter 7 liquidation is unnecessary at the moment.
According to the WSJ, new court documents reported that funds from liquidation are still coming in, including more than $100 million expected in July. The argument against Salus Capital’s claim is therefore that the debt tally is impossible to calculate with the company only midway through the bankruptcy process. Indeed, the parties argue that the bankruptcy has actually been successfully handled.
In fact, new court papers show that since its sale to Standard General, Radioshack has effectively repaid over $250 million in second rank debt. This includes $55 million toward the reported $250 million debt owed to Salus Capital.