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
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
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
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.
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
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.
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
Fitch currently rates Rite Aid Corporation as follows:
--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.