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Fitch Rates Rite Aid's New Term Loan and Notes; Outlook Stable
June 20, 2013 / 8:34 PM / 4 years ago

Fitch Rates Rite Aid's New Term Loan and Notes; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, June 20 (Fitch) Fitch Ratings assigns a 'BB-/RR1' rating to Rite Aid Corporation's (Rite Aid) new $500 million second-lien term loan due 2021 and a 'CCC+/RR5' rating to the new $810 million of 6.75% senior guaranteed unsecured notes due in 2021. The proceeds are intended to refinance Rite Aid's $500 million of 7.5% senior second-lien notes due 2017 and $810 million of 9.5% guaranteed unsecured notes due 2017. Post the February and current refinancings, Rite Aid's annual interest will decrease by $85 million and debt maturities will have been pushed out to 2019 (besides its revolver which matures in February 2018). The Rating Outlook is Stable. A complete list of ratings follows at the end of this release. KEY RATING DRIVERS --Rite Aid's high leverage and operating statistics that significantly trail its two major competitors; --Strong market share position as the third largest U.S. drug retailer; --Management's concerted efforts to improve the productivity of its store base and manage liquidity through a series of refinancings that have pushed out major debt maturities to 2019, working capital reductions and other cost cutting initiatives. In fiscal 2013, Rite Aid's underlying prescription count experienced volume growth of 3.4% as Rite Aid benefited from the impasse between Walgreens and Express Scripts (ESRX). Same store prescription count was flat in the first quarter of fiscal 2014, in line with Fitch's expectations of volume growth going forward. The generic wave continues to bolster gross margins and EBITDA was $1.2 billion for the LTM period ending June 1, 2013. Adjusted debt/EBITDAR and EBITDAR/interest plus rent improved to 6.3x and 1.5x, from 6.6x and 1.4x at year end, respectively. Fitch expects adjusted leverage to be in the 6.5x - 7.0x range over the next 24 months, assuming same store sales growth in the -1% range and EBITDA in the $1.1 billion range in fiscal 2014 and about $950 million in fiscal 2015. Gross margins are expected to be flat to down beginning second half of fiscal 2014 as generics cycle through. Rite Aid's operating metrics still significantly lag those of its largest and well-capitalized competitors, with average weekly prescriptions per store of approximately 1,230 and an EBITDA margin of 4.8% (versus Walgreens' EBITDA margin at 6.5% and CVS's retail EBITDA margin at 11.2%). Beyond the benefit from the generic wave and the recent benefit from gaining script volume from Walgreens, Fitch does not expect meaningful top-line and EBITDA expansion over the next couple of years. Rite Aid has largely been unable to participate in the strong industry growth largely due to capital constraints, and the company's inability to appropriately invest in its stores remains an ongoing concern. The Wellness+ loyalty card program and the Wellness remodels (with 20% of the stores remodeled to date) have helped the company to stabilize its prescription volume and see modest front-end growth. However, capital spending remains below levels required to remain competitive, and the company's market share could continue to weaken over time, even in markets where it has a top-three position. As a result, Fitch expects Rite Aid's topline to remain modestly negative given front end same store sales expectations of +1% and pharmacy same store sales of -1 to -2% (with prescription growth of 0 to 1%). At June 1, 2013, Rite Aid had cash of $108.9 million and excess borrowing capacity of approximately $1.14 billion under its credit facility, net of $113 million in outstanding letters of credit. Rite Aid has maintained liquidity in the $950 million - $1.2 billion range for the past three years. Fitch expects free cash flow, net of capital expenditures of $400 million, to be in the $200 to $250 million million range over the next couple of years, which will enable the company to modestly reduce debt overtime or invest a bit more on the Wellness remodels. The company has been actively refinancing its debt maturities over the past year, pushing out the next major maturities to 2019. RATING SENSITIVITIES Positive: A positive rating action is unlikely at this point, given the lack of visibility on EBITDA growth and material debt reduction. Negative: A negative rating action could result from deteriorating sales and profitability trends that lead to liquidity concerns and/or the company's inability to address debt maturities in a timely fashion. RECOVERY CONSIDERATIONS The issue ratings shown above are derived from the IDR and the relevant Recovery Rating. Fitch's recovery analysis assumes a liquidation value under a distressed scenario of approximately $6 billion on inventory, receivables, owned real estate, and prescription files. The $1.795 billion revolving credit facility, the $1.161 billion Tranche 6 term loan, and the $650 million senior secured notes due August 2020 have a first lien on the company's cash, accounts receivable, investment property, inventory, and script lists, and are guaranteed by Rite Aid's subsidiaries, giving them an outstanding recovery (91% - 100%). The $1.795 billion revolving credit facility is due to mature in 2018. The senior secured credit facility will require the company to maintain a minimum fixed charge coverage ratio of 1.0x only if availability on the revolving credit facility is less than $150 million. Rite Aid's fixed charge coverage ratio was above the minimum required amount at the end of the last quarter. Rite Aid's senior secured notes that have a second lien on the same collateral as the revolver and term loans and that are guaranteed by Rite Aid's subsidiaries are also expected to have outstanding recovery prospects. Given the amount of secured debt in the company's capital structure, the unsecured guaranteed notes are assumed to have below-average recovery prospects (11% - 30%) and the unsecured non-guaranteed notes and convertible bonds are assumed to have poor recovery prospects (0% - 10%) in a distressed scenario. Fitch rates Rite Aid Corporation as follows: --IDR 'B-'; --Secured revolving credit facility and term loans 'BB-/RR1'; --First and second lien senior secured notes 'BB-/RR1'; --Guaranteed senior unsecured notes 'CCC+/RR5'; --Non-guaranteed senior unsecured notes 'CCC/RR6'. The Rating Outlook is Stable. Contact: Primary Analyst Monica Aggarwal, CFA Senior Director +1-212-908-0282 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Philip M. Zahn, CFA Senior Director +1-312-606-2336 Committee Chairperson Timothy Greening Managing Director +1-312-368-3205 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology', (Aug. 8, 2012); --'Evaluating Corporate Governance', (Dec. 12, 2012); --'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers', (Nov. 13, 2012); --'High Yield Retail Checkout' (Jan. 12, 2012). Applicable Criteria and Related Research: Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective Jun. 7, 2011 to Jun. 7, 2012 here Corporate Rating Methodology – Effective 12 August 2011 to 8 August 2012 here Evaluating Corporate Governance – Effective 13 Dec 2011 to 12 Dec 2012 here High Yield Retail Checkout -- Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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