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Fitch Affirms Rite Aid's IDR at 'B-'; Rates New Notes 'CCC/RR5'; Outlook to Stable

Thursday, May 3, 2012 6:18 PM

Fitch Ratings has assigned a rating of 'CCC/RR5' to Rite Aid Corporation's (Rite Aid) $421 million of 9.25% guaranteed senior unsecured notes due March 15, 2020. The notes are being offered as additional notes under an existing indenture pursuant to which Rite Aid previously issued $481 million 9.25% senior notes in February 2012. Between the two bond issues, Rite Aid has addressed its 2015 debt maturities of $459 million 8.625% and $405 million 9.375% guaranteed senior unsecured notes due 2015.

Rite Aid still has $1,044 million of first lien secured term loans due June 2014 and a combination of $880 million of first and second lien secured notes due mid-2016. Given the quality of its collateral, Fitch expects Rite Aid to be able to address these maturities in a timely fashion (Fitch expects the 2014 maturities will be addressed in early 2013), barring any significant deterioration in its business trends or disruption in the credit markets.

RATINGS AFFIRMED; OUTLOOK TO STABLE: As a result of its recent debt refinancing activity as well as the stabilization in its operating trends, Fitch has affirmed its ratings on Rite Aid and revised the Rating Outlook to Stable from Negative. A full rating list is shown at the end of the press release.

The ratings continue to reflect the following:

--Rite Aid's high leverage, limited capital for investment and operating statistics that significantly trail its two major competitors;

--Strong market share position as the third largest U.S. drug retailer;

--Management's concerted efforts to improve the productivity of its store base and manage liquidity through refinancing activity over the last two years, working capital reductions and other cost cutting initiatives.

Fitch expects that credit metrics (with adjusted debt/EBITDAR at 7.4x and EBITDAR/interest + rents at 1.3x as of March 3, 2012) will remain stable over the next three years. There has been some recent improvement in EBITDA with same store sales turning modestly positive since the fourth quarter of fiscal 2011. The current impasse between Walgreen and Express Scripts since January 2012 (where Walgreen is no longer part of the Express Scripts pharmacy network) is also providing a boost to prescription volume and therefore to EBITDA.

Over the next 12-24 months, the generic wave could provide a nice windfall to the company's profitability. Whether this pushes EBITDA into the $1 billion-plus range remains to be determined given offsetting factors such as (1) ongoing pressure on pharmacy reimbursement rates from both the pharmacy benefit management companies, which could intensify given the recent merger between Medco and Express Scripts, and the state and federal governments and (2) potential share losses to larger and more capitalized competitors.

For the fiscal year ended Jan. 3, 2012, total same store sales was positive at 2% with a front-end same store sales increase of 1.1% and a pharmacy same store sales increase of 2.4%. Adjusted EBITDA (adjusted for non-cash and one-time items) increased to $943 million from $859 million, the first increase in four years. This partly reflects the benefit from prescription transfers from Walgreens and a 53rd week in the year.


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