TEXT - Fitch rates Rite Aid's new revolver and secured term loans

Tue Feb 5, 2013 11:10am EST

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Feb 5 -  Fitch Ratings has assigned a rating of 'BB-/RR1' to Rite Aid
Corporation's (Rite Aid) proposed new $1.725 billion secured revolving
credit facility due 2018, $900 million senior secured term loan B due 2020, and
$470 senior secured second lien term loan due 2020. The Rating Outlook is
Stable. 

The proceeds will be used to refinance Rite Aid's existing $1.175 billion ABL 
facility due 2015, $1.039 billion first lien secured term loan due 2014, $410 
million first lien secured notes due 2016, and $450 million second lien secured 
notes due 2016, leaving it with the same mix of first and second lien secured 
debt post refinancing. Further, the company plans to redeem $186 million of 
senior unsecured notes due 2013 with cash on hand. 

The ratings continue to reflect the following:

--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 debt 
maturities to 2017, working capital reductions and other cost cutting 
initiatives. 

Rite Aid's same store sales have been positive in six of the last eight 
quarters. Underlying prescription count has been stable at flat to positive 1%, 
with volume growth in the 3%-4% range over the last year as Rite Aid benefited 
from the impasse between Walgreens and Express Scripts (ESRX). The strong 
generic wave boosted gross margins, and EBITDA will surpass $1 billion for the 
first time in fiscal 2013. However, Fitch Ratings expects that it could be 
challenging for Rite Aid to maintain EBITDA above $1 billion given potential 
share losses to larger competitors, ongoing pressure on pharmacy reimbursement 
rates with less benefit from generics in 2013 and beyond, and giveback of a 
portion of ESRX volume.

Rite Aid's operating metrics still significantly lag those of its largest and 
well-capitalized competitors, with average weekly prescriptions per store of 
approximately 1,200 and an EBITDA margin of 4.1% (versus Walgreens' EBITDA 
margin at 6.6% and CVS's retail EBITDA margin at 10.6%). 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 recent remodeling activity 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. 

Adjusted debt/EBITDAR and EBITDAR/interest plus rent improved modestly in the 
LTM ended Dec. 1, 2012, to 6.9x and 1.4x, respectively and are expected to end 
fiscal 2013 at these levels. Credit metrics are expected to be in the 7x-7.5x 
range in fiscal 2014-2016, assuming same store sales growth in the +/- 1% range 
and EBITDA in the range of $850 million-$1 billion.

At Dec. 1, 2012, Rite Aid had cash of $264 million and excess borrowing capacity
of $1,057 million under its credit facility. The company has maintained 
liquidity in the $850 million to $1.2 billion range for the past 12 quarters. 

RECOVERY CONSIDERATIONS

The issue ratings shown above are derived from the Issuer Default Rating (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 $1.725 
billion revolving credit facility, term loans, 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 prescription lists, and are 
guaranteed by Rite Aid's subsidiaries giving them an outstanding recovery 
(91%-100%). 

The $1.725 billion revolving credit facility is due to mature in 2018. However, 
there is a springing maturity in the event that Rite Aid does not repay, 
refinance or otherwise extend the $500 million 7.5% second lien notes or the 
$810 million senior notes prior, both due in 2017, to 91 days before their 
respective maturities. 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 senior secured term loan notes, which have a second lien on the same 
collateral as the revolver and term loans, are also expected to have outstanding
recovery prospects. Given the amount of secured debt in the company's capital 
structure, theunsecured guaranteed notes are assumed to have below-average 
recovery prospects (11%-30%) and unsecured notes and convertible bonds are 
assumed to have poor recovery prospects (0%-10%) in a distressed scenario. 

SENSITIVITY/RATING DRIVERS

Positive: A positive rating action is unlikely at this point, given the lack of 
visibility on EBITDA growth and debt reduction. 

Negative: A negative rating action could result from deteriorating sales and 
profitability trends.

Fitch currently 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.
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