US CREDIT-Rite Aid's high debt load remains a challenge

By Karen Brettell

NEW YORK, Oct 20 (Reuters) - Rite Aid Corp (RAD.N) has
shored up liquidity and removed near term default risk by
refinancing its debt, however as its earnings remain under
pressure, the pharmacy chain operator will be challenged to
reduce its still high debt load.

The No. 3 drugstore operator on Monday sold $270 million in
senior secured bonds, up from an originally planned $250
million, which will be used to refinance securitization
facilities that mature in 2010.

The sale is part of a broader refinancing designed to
enhance the company's liquidity by extending its nearest debt
maturities until 2012, and also includes raising its borrowing
capacity in revolving credit facility. For details, see
[ID:nN19364627].

"The refinancing activity has greatly reduced Rite Aid's
short term refinancing risk and the company has introduced cost
cutting measures and inventory reduction plans that have helped
reduce some of the fundamental liquidity concerns and
relatively high debt levels," Robert Veno, analyst at KDP
Investment Advisors, said in a report.

Rite Aid's bonds and credit default swaps rallied on the
refinancing, but continue to reflect concerns over the
company's high debt levels.

The cost to insure Rite Aid's debt with credit default
swaps fell 4 percentage points to 14.5 percent as an upfront
cost, or $1.45 million to insure $10 million in debt for five
years, in addition to annual payments of $500,000, according to
Markit Intraday.

The company's 9.5 percent bond due 2017 rose almost 2 cents
on the dollar to 83.75 cents, according to MarketAxess.

Rite Aid's leverage, a measure of debt relative to earnings
before interest, taxes, depreciation and amortization (EBITDA),
remains at a high 9.3 times, according to Moody's Investors
Service.

"This level of leverage is unsustainable over the medium
term at the company's current level of operating performance,"
Moody's said.

Rite Aid is struggling to absorb its 2007 acquisition of
the Brooks and Eckerd chains, which added hundreds of stores
that have underperformed Rite Aid's own locations.

The pharmacy chain is also falling behind its competitors
Walgreen Co (WAG.N) and CVS Caremark Corp (CVS.N) in terms of
weekly prescriptions sold per store, said Fitch Ratings.

"If Rite Aid is unable to improve average weekly
prescriptions per store or gain traction at the Brooks Eckerd
stores acquired in June 2007, EBITDA margins are likely to
remain pressured on weak top line growth and market share
losses," Fitch said.

Moody's rates Rite Aid Caa2, eight levels below investment
grade and a deeply speculative ranking.

This rating accounts for the likelihood that the company's
operating results will remain weak, and it will be unable to
generate its current level of free cash flows once its
inventory levels normalize and it increases its capital
spending, Moody's said.

"This will likely make it challenging for the company to
significantly reduce its heavy debt burden," Moody's said.

Standard & Poor's and Fitch Ratings both rate the company
B-minus, six steps below investment grade and also a high risk
rating category.

Rite Aid last month forecast a wider fiscal-year loss on
falling sales, raising new doubts over its ability to improve
its business. [ID:nN24396230]
(Editing by James Dalgleish)