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Rite Aid moves to refinance debt
February 14th, 2012
CAMP HILL, Pa. – Rite Aid Corp. plans to issue $481 million in senior unsecured notes due in 2020 to help fund a debt refinancing.
On Tuesday, the drug store chain said it began a tender offer to buy $459 million of its 8.625% senior notes due in 2015 and would call any of the notes not tendered in the offer for redemption.
Rite Aid aims to use the proceeds from the offering of the 9.25% senior notes due in 2020, along with available cash, to help pay for the purchase of the notes maturing in 2015.
The tender offer, $996.25 per $1,000 of face value, expires on March 13. Those who tender their notes by that date will also receive a $30 consent payment, Rite Aid said.
With the refinancing announcement, Rite Aid shares were up 8 cents, or about 5%, to $1.54 as of noon trading on Tuesday.
Rite Aid's move to issue unsecured notes marks a positive step for the chain, which has some key debt maturities to address in the next few years.
Financial analysts noted that Rite Aid hasn't issued unsecured notes since its acquisition of over 1,800 Brooks/Eckerd drug stores several years ago. The deal saddled Rite Aid with a heavy debt load and, as the retailer went through a difficult integration process, the company struggled with net losses and weak sales before recent improvements in its top line and better cost controls helped narrow its quarterly losses and lift operating results.
On Tuesday, Fitch Ratings reiterated its issuer default rating of B- and negative rating outlook for Rite Aid in assigning a CCC/RR5 rating to the unsecured notes due in 2020.
"In the next couple of years, Rite Aid will have to address a series of significant debt maturities that will occur between 2014 and 2016, in an aggregate amount of $2.5 billion post this refinancing. To the extent that Rite Aid successfully addresses upcoming debt maturities and sustains stable to positive same-store sales and EBITDA trends, Fitch would resolve the negative outlook," the rating agency stated Tuesday.
Fitch added, "The company is also highly dependent on favorable credit market conditions to get this magnitude of refinancings completed, given modest free cash flow generation."
This past fall, Fitch had downgraded Rite Aid's rating outlook from stable to negative, citing the retailer's unsecured debt as the key reason, despite noting that the chain had improved its same-store sales and EBITDA (earnings before interest, taxes, depreciation and amortization) performance over the previous four quarters.
"The main concern reflected in Fitch's negative rating outlook is that in the next several years Rite Aid will have to address a series of significant debt maturities between 2014 and 2016, including approximately $1 billion of unsecured notes that mature in 2015. Most debt refinancing activity since 2008 has been on a secured basis. The company last issued unsecured notes in May 2007 as part of the Brooks/Eckerd Pharmacy acquisition financing, besides $150 million 8.5% convertible notes issued in May 2008," Fitch stated in a retail sector report released last week.
"Even though the collateral suggests comfortable recovery for secured lenders," Fitch said in the report, "secured lenders in 2014 may not want to go beyond the maturities on the unsecured paper, creating the need for more comprehensive refinancing over the next couple of years."
Meanwhile, Moody's Investors Service on Tuesday assigned a Caa3 rating to Rite Aid's notes due 2020 and maintained its "stable" rating outlook for the retailer.
Although Rite Aid's credit metrics remain weak, the chain has sufficient liquidity that "provides it with runway to address its debt maturities," according to Moody's.
"Positive ratings consideration is also given to Rite Aid's large revenue base and the solid opportunities of the prescription drug industry," Moody's stated. "The stable outlook acknowledges Rite Aid's adequate liquidity and lack of near dated debt maturities. Rite Aid's next significant debt maturity is in 2014, when the remaining $1 billion of term loans is due. In addition, the stable outlook reflects our expectation that Rite Aid's earnings will modestly improve but that the improvement will not meaningfully improve its credit metrics."
*Editor's Note: Article updated with additional rating agency comment.