Fitch Rates Rite Aid's New Revolver and Secured Term Loans 'BB-/RR1';
NEW YORK -- February 5, 2013
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
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
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
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
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.
Additional information is available at www.fitchratings.com. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.
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. 17, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
High-Yield Retail Checkout
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Monica Aggarwal, CFA, +1-212-908-0282
One State Street Plaza
New York, NY 10004
Philip M. Zahn, CFA, +1-312-606-2336
Megan Neuburger, +1-212-908-0501
Brian Bertsch, +1-212-908-0549
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