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Fitch Rates Rite Aid’s New Revolver, Secured Term Loans ’BB-/RR1’; Outlook Stable

February 06, 2013, 08:07 AM
Filed Under: Corporate Ratings

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, the unsecured 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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