Rite Aid cut net debt, leverage, interest expense; will tap revolver to call 8% notes in August

By Paul Deckelman

New York, April 8 – Rite Aid Corp. cut its total and net debt loads, its leverage ratio of net debt as a multiple of trailing 12-month adjusted EBITDA and its interest expense versus year-earlier levels during its recently completed 2015 fiscal year, company executives said Wednesday.

And the Camp Hill, Pa.-based Number -Three U.S. drugstore retailer anticipates further interest-cost reductions later on this year when it refinances its $650 million of outstanding 8% senior secured first-lien notes due 2020 at their first-call date.

Active revolver use

The company’s chief financial officer and executive vice president, Darren Karst, noted on its conference call following the release of results for the 2015 fiscal fourth quarter and full year ended Feb. 28 that in January, Rite Aid had completed a refinancing and re-pricing of its revolving credit facility, under which the facility was increased to $3 billion from $1.8 billion previously, with the additional proceeds used to repay its then-outstanding $1.15 billion of tranche 7 term loan debt due 2020.

He told analysts on the call the company expects that refinancing to save Rite Aid about $20 million in interest expense annually, and said that the company has the ability to increase its revolver availability yet again, to $3.7 billion, if it chooses to use those proceeds to repay the 8% notes, “which we expect to do when they become callable in August 2015,” at a price of 104.

“We expect this refinancing of the 8% notes, with the use of our revolver, to provide an additional $30 million in annual interest expense savings,” the CFO added.

Karst said that at the end of fiscal 2015, Rite Aid had about $1.2 billion of liquidity – down by $114 million versus a year earlier, primarily due to its use of the revolver to fund the early redemption and repayment of its $270 million of outstanding 10¼% senior secured second-lien notes due 2019.

Net debt, leverage decline

Rite Aid had total debt at the end of fiscal 2015 of $5.65 billion – down sequentially from $5.85 billion at the end of the 2015 fiscal third quarter on Nov. 29, 2014 and down as well from $5.76 billion at the end of the previous fiscal year on March 1, 2014.

Less $227,000 of invested cash, net debt for the latest period came to $5.65 billion, down from $5.85 billion at the end of the fiscal third quarter and from $5.75 billion at the end of the previous fiscal year.

Karst said that its leverage ratio – which the company defines as total debt less invested cash over its trailing 12-month adjusted EBITDA – improved to 4.27 times at the end of fiscal 2015, versus 4.34 times the year before.

The company had $1.73 billion of revolver borrowings outstanding at the end of fiscal 2015, as well as $71 million of outstanding letters of credit.

Other secured debt on its balance sheet, according to its most recent 10-Q filing with the Securities and Exchange Commission after the end of its fiscal third quarter, included the $650 million of 8% notes that will be called this summer, as well as $470 million of second-lien tranche 1 term loan debt due in 2020 and $500 million of second-lien tranche 2 debt due in 2021.

Its capital structure, according to the filing, also included two issues of guaranteed unsecured debt ($902 million of 9¼% senior notes due 2020 and $810 million of 6¾% senior notes due 2021) as well as two issues of unguaranteed, unsecured, longer-maturity junk-bond debt ($295 million of 7.7% notes due 2027 and $128 million of 6 7/8% fixed-rate senior notes due 2028).

The closest-maturing debt on the balance sheet was Rite Aid’s $64.18 million of outstanding 8½% convertible debt slated to come due on May 15 of this year. There was no specific mention or discussion about these notes on the conference call.

New bonds fund acquisition

On March 19, Rite Aid priced $1.8 billion of new 6 1/8% senior notes due 2023 at par following a short roadshow. Proceeds from the bond sale are earmarked for paying the cash consideration portion of the $2 billion purchase price for Envision Pharmaceutical Services (EnvisionRx), a Twinsburg, Ohio-based pharmacy benefits management company. Under the terms of the acquisition deal, which was announced on Feb. 11, Rite Aid will pay $1.8 billion in cash and $200 million in stock for EnvisionRx.

Karst said on the conference call that “in the unlikely event that we do not complete the acquisition of Envision, we can either redeem these notes at a price of 101 or use these notes to refinance other indebtedness.”

In issuing its guidance for the current 2016 fiscal year, which began on March 1, Karst said that such guidance does not reflect any impact from the pending acquisition of EnvisionRx, due to the uncertainty as to when the transaction will close, nor does it include the incremental interest expense from the new 6 1/8% notes. He said the company would update its guidance to include the impact of Envision as well as the interest expense on the new bonds after it closes the transaction. The EnvisonRx deal is expected to close by September, subject to regulatory approvals and other customary closing conditions.

The CFO said that “if you assume the acquisition closes in September,” the outside closing date under the Envision merger agreement, then the interest expense on the 6 1/8% notes would add about $55 million of interest expense during the period prior to that closing date.

Rite Aid had interest expense of $98.44 million during its fiscal fourth quarter, up sequentially from $97.4 million in the fiscal third quarter, but down from $101.99 million in the year-earlier period. Its latest-quarter interest costs consisted of $86.77 million of cash interest costs and $11.67 million of non-cash interest expense.

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