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

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. Excluding the benefit from Walgreens, Fitch expects pharmacy prescription volume and front-end sales to grow in the 1% range and EBITDA to benefit modestly in 2012 and 2013 from the introduction of higher margined generics, somewhat offset by continued pharmacy reimbursement pressures.

Risks to estimates are a decline in same store sales trends due to macro weakness or share losses to its larger peers, and higher than expected decline in reimbursement rates. Rite Aid's operating metrics significantly lag those of its largest and well-capitalized competitors, CVS Caremark and Walgreen. Rite Aid has been unable to participate in the strong industry growth largely due to capital constraints, and the company's inability to appropriately invest in its stores remains an ongoing concern. Beyond the benefit from the generic wave in 2012-14, Fitch does not expect meaningful top-line and EBITDA expansion over the next few years given the lack of capital to execute successfully on its plans to address underperforming stores. As a result, EBITDA margins are likely to remain depressed, which at 3.6% (excluding non-cash and one-time items) is significantly below its two leading competitors' margins (with Walgreen's EBITDA margin at 7% excluding the loss of Express Scripts business and CVS' retail EBITDA margin at 9.9%).

LIQUIDITY AND DETAILS OF UPCOMING DEBT MATURITIES

At March 3, 2012, Rite Aid had cash of $162 million and excess borrowing capacity of $911 million under its credit facility. The company has maintained liquidity in the $850 million to $1.2 billion range for the past eight quarters.

Fitch expects that Rite Aid could refinance $180 million of unsecured unguaranteed bonds due August 2013 through credit facility borrowings and modest free cash flow (FCF). Rite Aid is required to buy back $64 million of 8.5% convertible notes due May 2015 should its shares become delisted.

Given the quality of its collateral, Rite Aid should be able to refinance the $1 billion secured term loan due June 2014 on its own. The collateral consists of (1) marketable prescription files with a total of approximately 295 million prescriptions filled annually that could be valued at $10 to $20 per script; and (2) pharmacy as well as nonprescription inventories.

RECOVERY CONSIDERATIONS

The issue ratings shown above are derived from the Issuer Default Rating (IDR) and the relevant Recovery Rating. Fitch's recovery analysis assumes a liquidation value under a distressed scenario of approximately $6 billion on inventory, receivables, owned real estate and prescription files. The $1.175 billion revolving credit facility, term loans, $410 million senior secured notes due June 2016 and the $650 million senior secured notes due August 2020 have a first lien on the company's cash, accounts receivable, investment property, inventory and prescription lists, and are guaranteed by Rite Aid's subsidiaries giving them an outstanding recovery (91%-100%).

The $1.175 billion revolving credit facility is due to mature on Aug. 19, 2015. However, the maturity would be April 18, 2014 in the event that Rite Aid does not repay, refinance or otherwise extend the remaining term loans ($1,079 million Tranche 2 Term Loan and $343 million Tranche 3 Term Loan due June 1, 2014) prior to that time and meet certain other conditions. The senior secured credit facility requires the company to maintain a minimum fixed charge coverage ratio (of 1.0x through Nov. 26, 2011 and 1.05x thereafter) only if availability on the revolving credit facility is less than $150 million. Rite Aid's fixed charge coverage ratio was above the minimum required amount at the end of the last quarter.

Rite Aid's senior secured notes have a second lien on the same collateral as the revolver and term loans and are guaranteed by Rite Aid's subsidiaries. These are also expected to have outstanding recovery prospects. Given the amount of secured debt in the company's capital structure, the unsecured guaranteed notes are assumed to have below-average recovery prospects (11%-30%) and unsecured notes and convertible bonds are assumed to have poor recovery prospects (0%-10%) in a distressed scenario.

Fitch has affirmed Rite Aid Corporation's ratings as follows:

--IIDR at 'B-';

--Secured revolving credit facility and term loans at 'BB-/RR1';

--First and second lien senior secured notes at 'BB-/RR1';

--Guaranteed senior unsecured notes at 'CCC/RR5';

--Non-guaranteed senior unsecured notes at 'CC/RR6'.

The Rating Outlook has been revised to Stable from Negative.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', (Aug. 12, 2011);

--'Evaluating Corporate Governance', (Dec. 13, 2011);

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers', (May 12, 2011);

--'Analysis of U.S. Corporate Pensions' (Aug. 5, 2011);

--'High Yield Retail Checkout' (Jan. 12, 2012).

Applicable Criteria and Related Research:

High Yield Retail Checkout -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=666356

Analysis of U.S. Corporate Pensions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts:

Fitch Rating
Primary Analyst
Monica Aggarwal, CFA, [phone]
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Philip M. Zahn, CFA, [phone]
Senior Director
or
Committee Chairperson
Mark Oline, [phone]
Group Managing Director
or
Media Relations
Brian Bertsch, New York, [phone]
[e-mail]