Fitch Affirms Rite Aid's IDR at 'B-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 26 (Fitch) Fitch Ratings has affirmed its ratings on Rite Aid Corporation (Rite Aid), including its Issuer Default Rating (IDR) at 'B-'. The Rating Outlook is Stable. A complete list of ratings is provided 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 debt maturities to 2017, working capital reductions and other cost cutting initiatives. Rite Aid's underlying prescription count experienced volume growth of 3.4% 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 was $1.1 billion in fiscal 2013, surpassing the $1 billion level for the first time. Adjusted debt/EBITDAR and EBITDAR/interest plus rent improved in fiscal 2013, ending at 6.6x and 1.4x, respectively. Fitch expects adjusted leverage to be in the 6.7x - 7.1x range over the next 24 months, assuming same store sales growth in the -1% range and EBITDA in the $1 billion range. 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 4.4% (versus Walgreens' EBITDA margin at 6.5% and CVS's retail EBITDA margin at 11%). 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. 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 approximately 1%). At March 2, 2013, Rite Aid had cash of $129.5 million and excess borrowing capacity of approximately $1.015 billion under its credit facility, net of $115 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 million range over the next couple of years, which will enable the company to modestly reduce debt overtime. The company has been actively refinancing its debt maturities over the past year, pushing out the next major maturities to 2017. Fitch expects the company will continue to look for opportunity to extend maturities and lower the average cost of debt as bonds become callable. 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. 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, both due in 2017, prior 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 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 has affirmed Rite Aid Corporation's ratings as follows: --IDR at 'B-'; --Secured revolving credit facility and term loans at 'BB-/RR1'; --First and second lien senior secured notes at 'BB-/RR1'; --Guaranteed senior unsecured notes at 'CCC+/RR5'; --Non-guaranteed senior unsecured notes at '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 here Corporate Rating Methodology here Evaluating Corporate Governance 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. 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