Rating outlook raised for Rite Aid
NEW YORK Fitch Ratings affirmed Rite Aid's issuer default rating at 'B-' and revised the rating outlook to stable from negative Wednesday evening, following the chain’s progress in refinancing 2010 debt maturities.
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.
With Rite Aid’s outlined plan to refinance its 2010, the chain has alleviated bankruptcy concerns, Fitch stated. However, 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, Fitch cautioned.
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 pro forma basis, providing the company with adequate liquidity over the intermediate term.
After 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.
Once the refinancing is 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. 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, EBITDA margins are likely to remain pressured on weak top line growth and market share losses. Rite Aid's EBITDA margin at 3.7% for fiscal year ended Feb. 28, 2009 is significantly below its two leading competitors' margins from 7.5% to 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 fiscal year 2010 and adjusted debt/EBITDAR for fiscal year 2010 and fiscal year 2011 will remain at or be slightly above the 7.4 times reported for fiscal year 2009. 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 fiscal year 2010 below levels required to remain competitive.