Rite Aid Continues Debt Refinancing

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Drugstore chain retailer, Rite Aid Corporation (RAD) has come up with its second refinancing scheme in this month, commencing a $400 million senior notes offering maturing in 2021. The company plans to use the proceeds from this offering along with its existing cash and borrowings to redeem an equivalent amount of senior notes bearing an interest rate of 9.5% due in 2017.

The company expects the fees, expenses and charges related to the refinancing transactions to weigh upon its financial results, including net income and earnings per share, and guidance.

At the end of fiscal 2013, this Zacks Rank #2 (Buy) company had $665.0 million borrowing outstanding under its senior credit facility, and $115 million of outstanding letters of credit.

Earlier this month, the company had announced its first debt refinancing transaction in an attempt to extend the maturity of some debts and lower interest expenses. The transaction involves a cash tender offer to redeem all of Rite Aid’s 7.5% Senior Secured Notes worth $500 million with proceeds from a new $500 million second-lien term loan, along with existing cash and borrowings.

Along with its refinancing transaction in early June, Rite Aid provided estimates for first-quarter 2014 and fiscal 2014. Rite Aid, which trails Walgreen Co. (WAG) and CVS Caremark Corp. (CVS) in terms of store count, anticipates net income in the range of $75–$90 million or 8–9 cents per share. Moreover, Rite Aid is expecting adjusted EBITDA in the range of $335 million – $345 million.

For fiscal 2014, the company raised its low-end adjusted EBITDA guidance range to $1.090 billion from $1.075 billion, but it kept its high-end guidance of $1.175 billion unchanged. However, Rite Aid lowered its fiscal 2014 high-end adjusted earnings guidance. The company now expects adjusted net income in the range of $49–$189 million or 4–19 cents per share, compared with 4–20 cents forecasted earlier.

Another company that recently indulged in refinancing transaction is Avis Budget Group Inc. (CAR), a leading global car rental company. As part of the transaction, the company increased its term loan facility to $1 billion, from the existing $900 million, for a lower rate of interest. However, the new term loan borrowing had the same maturity as the existing facility of 2019.

The $1 billion term loan was refinanced at the LIBOR plus interest rate of 2.25% subject to a LIBOR floor of 0.75%. This represented savings of 75 basis points from the previous interest rate of LIBOR plus 2.75%, subject to a LIBOR floor of 1%. Simultaneously, the company announced the redemption of its $124 million worth of senior notes due 2018, bearing an interest rate of 9.625%, eliminating the outstanding balance of its high-cost debt.

We believe this act of curtailing interest rate on the existing loan facility and redeeming its high-cost debt will enable the company to save on its corporate interest expenses.

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