Fitch Rates Rite Aid's New Term Loan and Notes; Outlook Stable
NEW YORK -- June 20, 2013
Fitch Ratings assigns a 'BB-/RR1' rating to Rite Aid Corporation's (Rite Aid)
new $500 million second-lien term loan due 2021 and a 'CCC+/RR5' rating to the
new $810 million of 6.75% senior guaranteed unsecured notes due in 2021. The
proceeds are intended to refinance Rite Aid's $500 million of 7.5% senior
second-lien notes due 2017 and $810 million of 9.5% guaranteed unsecured notes
Post the February and current refinancings, Rite Aid's annual interest will
decrease by $85 million and debt maturities will have been pushed out to 2019
(besides its revolver which matures in February 2018). The Rating Outlook is
Stable. A complete list of ratings follows 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
major debt maturities to 2019, working capital reductions and other cost
In fiscal 2013, Rite Aid's underlying prescription count experienced volume
growth of 3.4% as Rite Aid benefited from the impasse between Walgreens and
Express Scripts (ESRX). Same store prescription count was flat in the first
quarter of fiscal 2014, in line with Fitch's expectations of volume growth
going forward. The generic wave continues to bolster gross margins and EBITDA
was $1.2 billion for the LTM period ending June 1, 2013. Adjusted debt/EBITDAR
and EBITDAR/interest plus rent improved to 6.3x and 1.5x, from 6.6x and 1.4x
at year end, respectively.
Fitch expects adjusted leverage to be in the 6.5x - 7.0x range over the next
24 months, assuming same store sales growth in the -1% range and EBITDA in the
$1.1 billion range in fiscal 2014 and about $950 million in fiscal 2015. Gross
margins are expected to be flat to down beginning second half of fiscal 2014
as generics cycle through.
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 4.8% (versus Walgreens' EBITDA
margin at 6.5% and CVS's retail EBITDA margin at 11.2%). 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 the Wellness remodels (with 20% of the stores
remodeled to date) 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 0 to 1%).
At June 1, 2013, Rite Aid had cash of $108.9 million and excess borrowing
capacity of approximately $1.14 billion under its credit facility, net of $113
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
to $250 million range over the next couple of years, which will enable the
company to modestly reduce debt overtime or invest a bit more on the Wellness
remodels. The company has been actively refinancing its debt maturities over
the past year, pushing out the next major maturities to 2019.
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.
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. 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 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'.
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 -
Effective Jun. 7, 2011 to Jun. 7, 2012
Corporate Rating Methodology -- Effective 12 August 2011 to 8 August 2012
Evaluating Corporate Governance -- Effective 13 Dec 2011 to 12 Dec 2012
High Yield Retail Checkout -- Amended
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Fitch Ratings, Inc.
Monica Aggarwal, CFA, +1-212-908-0282
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Philip M. Zahn, CFA, +1-312-606-2336
Timothy Greening, +1-312-368-3205
Brian Bertsch, +1-212-908-0549
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