Here is Part II of Article.
Once the refinancings are successfully completed, Fitch anticipates management can turn its full focus on improving core operations and rating movements will largely depend on Rite Aid's top line and profitability. Rite Aid's operating metrics significantly lag those of its large and well capitalized competitors, CVS Caremark and Walgreen. The latter two retailers have been gaining share through organic growth and folding in regional retailers in the case of CVS Caremark in many of Rite Aid's markets. If Rite Aid is unable to improve average weekly prescriptions per store (which has been flat at around 1,150 for the last few years versus Walgreen at 1,835 and CVS Caremark at 1,630 in their most current fiscal years) 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. Rite Aid's EBITDA margin at 3.7% (excluding non-cash and merger related expenses) for fiscal year ended Feb. 28, 2009 is significantly below its two leading competitors' margins at 7.5%-9%.
In the near term, Fitch expects anemic pharmacy same store sales and a decline in higher margin front-end same store sales could pressure gross margins. As a result, free cash flow could be neutral to slightly negative in FY2010 and adjusted debt/EBITDAR for FY2010 and FY2011 will remain at or be slightly above the 7.4 times (x) reported for FY2009. Rite Aid's ability to appropriately invest in its stores given its current free cash flow levels and indebtedness remain a concern as Fitch views the projected $250 million in capital spending for FY2010 below levels required to remain competitive.
The issue ratings shown above are derived from the IDR and the relevant recovery rating. The revolving credit facility, term loans and the new $410 million senior secured notes due June 2016 have a first lien on the company's cash, accounts receivable (to the extent not utilized by securitization facilities), investment property, inventory and scrip lists, and are guaranteed by Rite Aid's subsidiaries giving them an outstanding recovery (91%-100%). Rite Aid's senior secured notes that have a second lien on the same collateral and 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 unsecured notes and convertible bonds are assumed to have poor recovery prospects (0%-10%) in a distressed scenario. Fitch's recovery analysis assumes a liquidation value under a distressed scenario of $5.3 billion on inventory, owned real estate and prescription files.
SOURCE: Fitch Ratings
Fitch Ratings, New York Monica Aggarwal, CFA, 212-908-0282 Karen Ghaffari, CFA, CPA, 212-908-0708 or Media Relations: Cindy Stoller, 212-908-0526 Email: email@example.com
Sorry I didn't include the article earlier.
Fitch Affirms Rite Aid's IDR at 'B-'; Revises Outlook to Stable; Rates New Bonds
6:39p ET June 9, 2009 (Business Wire)
Fitch Ratings has affirmed Rite Aid's Issuer Default Rating (IDR) at 'B-' and revised the Rating Outlook to Stable from Negative.
In addition, Fitch has assigned 'BB-/RR1' ratings to Rite Aid's proposed $1 billion credit facility, the new $525 million term loan due June 2015, and the 9.75% $410 million senior first lien secured notes due June 2016.
Fitch has also affirmed the following ratings:
--Secured revolving credit facility and term loans at 'BB-/RR1';
--Second lien senior secured notes at 'BB-/RR1';
--Guaranteed senior unsecured notes at 'CCC/RR5';
--Non-guaranteed senior unsecured notes at 'CC/RR6'.
The Outlook revision to Stable from Negative reflects Rite Aid's progress in refinancing 2010 debt maturities, thus alleviating liquidity concerns. The ratings continue to consider Rite Aid's significant high leverage and limited capital for investment; operating statistics that significantly trail its two major competitors; and the ongoing risk of improving operations at the acquired Brooks Eckerd stores. In the near term, a decline in front-end same store sales could stall operating improvement at both core Rite Aid and Brooks Eckerd stores. The ratings also reflect Rite Aid's strong market share position as the third largest U.S. drug retailer and management's concerted efforts to improve the productivity of its store base and manage liquidity through working capital reductions and other cost cutting initiatives.
Rite Aid had significant refinancing in 2010 with its $345 million first lien accounts receivable securitization facility maturing in January 2010 (with backstop financing available in place through September 2010) and its $1.75 billion credit facility, $145 million term loan, and $225 million second priority accounts receivable securitization term loan all due in September 2010. Post the completion of its recent refinancing announcements, Rite Aid will have replaced its credit facility and paid down its $145 million term loan with a combination of a new $900 million to a $1 billion revolving credit facility that the company is currently negotiating, and the recent issuance of $525 million term loan and $410 million in senior first lien secured high yield notes. If the company is successful in securing a three-year $1 billion credit facility, availability under the new facility would be similar to that under its old facility (with availability of $724 million as of Feb. 28, 2009) on a proforma basis, providing the company with adequate liquidity over the intermediate term.
Post the refinancing of the credit facility and the $145 million term loan, the off balance sheet $345 million first lien accounts receivable securitization facility maturing in January 2010 and the $225 million second priority accounts receivable securitization term loan due in September 2010 are the only major remaining debt maturities over the next three years. Considered in the Stable Outlook is that Rite Aid will be able to replace this debt through refinancing under the existing structure or a combination of first or second lien secured term loans.