This is good news, but not new news. The banks have been working with Rad for years. They are not going to let Rad go BK. I have been saying that for some time now. No one wins if Rite Aid goes BK. If Rite Aid continues to make payments the banks are making money and are happy. Rite Aid just needs to keep up the payments and the turn around.
RAD has been able to extend maturities in recent years, but has not really been able to access lower interest rates and it hasn't been able to pay down debt. This refinancing may mark the first instance since the Jean Coutu deal of '07 that RAD may in fact be able to access lower interest rates, but we will have to see.
Here are three years of data from Yahoo:
In FY 2010, revenues were $25.7 billion, long term debt was $6.3 billion, and interest payments were $516 million. So the consolidated interest rate for that year was about 8.2%, and interest payments were 2% of revenue.
In FY 2011, revenues were $25.2 billion, interest expense was $548 million, and long term debt was $6.2 billion. So the consolidated interest rate was 8.8%, and interest payments were 2.2% of revenue.
In FY 2012, revenues were $26.1 billion, long term debt was $6.2 billion, and interest payments were $529 million. So the consolidated interest rate for that year was $8.5%, and interest payments were 2% of revenue.
I would say RAD has barely been able to afford this debt expense at 2% of revenue every year. Ideally, RAD would make progress on all 3 fronts - higher revenues, lower debt, and lower interest rates. Every little basis point counts. CVS and WAG spend less than 1% of revenues on interest. That may be the benchmark RAD needs to reach to have a healthy business.
"extend the maturity of a portion of Rite Aid's outstanding indebtedness and lower interest expense"
Rite Aid doesn't even need lower interest rates to improve cash flow. Improved cash flow from extending maturities will allow them to buy back debt with improved cash flow. Of course, the lower debt levels means lower interest payments and lower interest rates leading to even bigger cash flow and paying down of even more debt. A virtuous circle once Rite Aid shows has a few quarters of lower interest payments behind them.
Cash flow is going to be the secret to early success.