RadioShack Corp. (NYSE: RSH) seems to keep going from worse to even worse. Now an Issuer Default Rating downgrade to CC from CCC from Fitch highlights nearly the worst risk that the common stock shareholders could hear. The downgrade reflects the increasing likelihood that RadioShack will need to restructure its debt within the next 12 months.

Fitch pointed out that RadioShack had not received consent from its lenders to close up to 1,100 stores as contemplated by management. Fitch thinks this will lead it to close only 200 stores as permitted annually under its credit agreements. Fitch believes that closing fewer stores will be a drag on profitability and on free cash flow. Here is the kicker:

Fitch is increasingly concerned about the RadioShack’s ability to operate beyond 2014 given the significant cash burn in the business.

RadioShack’s total liquidity of $555 million at the end of 2013 was materially lower than $927 million in 2012, and Fitch stated that it does not believe that RadioShack has material sources of liquidity beyond its revolver as virtually all of its assets have been pledged to its credit facilities. Here is where the restructuring fears are pinpointed as to timing:

Fitch currently anticipates that RadioShack has enough liquidity to fund the 2014 holiday season, barring any significant change in vendor terms, but excess liquidity is expected to be very tight which could prompt a restructuring before year-end or early 2015.

READ MORE: Could RadioShack’s Stock Plunge to Zero?

Other assumptions going forward are 1) EBITDA will be negative $200 million or worse in 2014 and 2015, 2) SG&A is expected to decline by 4% to 5% in each of 2014 and 2015, 3) Free cash flow is expected to remain sharply negative at around -$250 million to -$300 million in 2014 and 2015, and 4) that RadioShack will have to tap its revolver during 2014 to finance operating losses and a seasonal working capital swing of $100 million to $150 million.

Fitch further warns:

A downgrade to ‘C’ would signify that Fitch believes that a default at RadioShack is imminent. This would be reflected by further strain on RadioShack’s cash flow and liquidity that impedes the company’s day to day operations.

RadioShack shares were unchanged at $1.34 after about an hour of trading, against a 52-week range of $1.28 to $4.36. One issue that may baffle stock screeners is that RadioShack’s $135 million market cap is actually a discount to its stated book value and tangible book value. The reason for this is simple: RadioShack is losing enough money and burning enough cash that its book value keeps contracting, and it is soon likely to be negative — very negative if Fitch’s analysis is correct.

READ MORE: The Next Wave of Dead Retailers

The following recovery analysis was provided on its various debt instruments:

• The ratings on the various securities reflect Fitch’s recovery analysis, which is based on a liquidation value of RadioShack in a distressed scenario of $564 million as of Dec. 31, 2013. Most of the value comes from inventories, half of which are assumed to be mobile phones which are assigned a liquidation value of 80%, and the balance is other inventories at a liquidation value of 50%. Fitch uses a liquidation value of 30% for receivables to reflect the netting out of estimated payables to the wireless carriers.
• The $585 million ABL facility, including a $535 million revolver and a $50 million term loan, has outstanding recovery prospects (91% — 100%), and a rating of ‘CCC+/RR1’. The ABL facility is secured by a first lien on current assets and a second lien on fixed assets, intellectual property and equity interests in subsidiaries.
• The $250 million second lien term loan has superior recovery prospects (71% – 90%). This loan is secured by a second lien on current assets and a first lien on fixed assets, intellectual property and equity interests in subsidiaries.
• The $325 million of senior unsecured notes due in May 2019 are rated ‘C/RR6’, reflecting poor recovery prospects (0% – 10%).

As a reminder, debt restructuring is synonymous with bankruptcy protection. If none of this sounds very positive for RadioShack’s common stock holders, there is a reason. The common stockholders likely would be wiped out entirely in a debt restructuring scenario, while the debt holders would get to fight over the remaining assets.

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