Rite Aid Corporation — Moody's changes Rite Aid's outlook to stable; affirms Caa1 CFR
Rating Action: Moody’s changes Rite Aid’s outlook to stable; affirms Caa1 CFR
Global Credit Research – 20 Aug 2020
New York, August 20, 2020 — Moody’s Investors Service, (“Moody’s”) today changed the outlook for Rite Aid Corporation (“Rite Aid”) to stable from negative. All other ratings including the company’s Caa1 corporate family rating and its Caa1-PD probability of default rating are affirmed and there is no change in the company’s SGL-3 speculative grade liquidity rating.
“Rite Aid has proactively addressed a large portion of its 2023 maturities which is a credit positive but operational and competitive challenges remain”, Moody’s Vice President Mickey Chadha stated. “The change in outlook to stable reflects our expectations for a modest improvement in credit metrics and positive free cash flow over the next 12 months, however, the retail pharmacy space remains under pressure and new management initiatives will take time to show results in the midst of the uncertain business environment”, Chadha further stated.
Affirmations:
..Issuer: Rite Aid Corporation
…. Probability of Default Rating, Affirmed Caa1-PD
…. Corporate Family Rating, Affirmed Caa1
….Senior Secured ABL Bank Credit Facility, Affirmed B2 (LGD3 from LGD2)
….Senior Secured Bank Credit Facility, Affirmed Caa1 (LGD4)
….Senior Secured Regular Bond/Debenture, Affirmed Caa1 (LGD4)
….Senior Unsecured Regular Bond/Debenture, Affirmed Caa3 (LGD6)
…. GTD Senior Unsecured Regular Bond/Debenture, Affirmed Caa2 (LGD5)
Outlook Actions:
..Issuer: Rite Aid Corporation
….Outlook, Changed To Stable From Negative
RATINGS RATIONALE
Rite Aid’s Caa1 rating incorporates it’s weak market position as it lacks the scale or the balance sheet to compete effectively with much larger and well capitalized competitors like CVS Health and Walgreens Boots Alliance, Inc. in the changing pharmacy landscape as scale has become increasingly more important in today’s competitive pharmacy sector. Moody’s expects Rite Aid’s lease adjusted debt/EBITDA to be at around 5.5x for the fiscal year ended March 2021 despite the uplift from robust front end sales in March and April due to pantry loading during the peak of the coronavirus pandemic given the competitive pressures Rite Aid is facing. The rating also reflects Rite Aid’s weak interest coverage with EBIT/interest of under 1.0x. Positive ratings consideration is given to Moody’s expectation that new management will focus on cost reduction, inventory rationalization, store remodels, growth in the Elixir PBM business, increase the level of script growth through increased traffic and file buys and strategically target participation in limited and preferred networks to boost revenue, earnings and free cash flow. Rite Aid’s adequate liquidity, and the relative stability and positive longer term trends of the prescription drug industry are other positive rating considerations.
Rite-Aid’s rating takes into consideration increasing social risks stemming from changing consumer preferences and spending patterns. The retail environment has been undergoing a structural shift toward e-commerce which has increased pressure on retailers. The rating also takes into consideration the litigation risk associated with prescription drug usage especially opioids. Rite Aid’s financial strategies have remained balanced with the company using cash received from asset sales to repay debt.
The stable outlook reflects Moody’s expectation that management initiatives including expense rationalization will improve operating performance and credit metrics in the next 12 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be upgraded if the company demonstrates a sustained improvement in operating performance. An upgrade would require improvement in operating margins, continued script volume growth and positive comparable front end sales. Ratings could also be upgraded if the company demonstrates that it can maintain debt/EBITDA below 6.0 times and EBIT to interest expense above 1.0 times. In addition, a higher rating would require Rite Aid to continue to maintain at least an adequate liquidity profile, including positive free cash flow.
Ratings could be downgraded should the likelihood of a default increase for any reason or if Rite Aid experiences a decline in revenues or earnings or increases debt such that debt/EBITDA is likely to remain above 6.5 times and EBIT to interest expense is likely to remain below 1.0 times. Ratings could also be downgraded should liquidity weaken including free cash flow remaining negative or the company does not get any traction on new PBM contracts or if prescription volumes decline.
Rite Aid Corporation operates 2,464 drug stores in 18 states. It also operates a full-service pharmacy benefit management company (Elixir). Revenues are about $22 billion.
The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Manoj Chadha VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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