Rite Aid aims to improve debt maturity profile through exchange offer

By Devika Patel

Knoxville, Tenn., June 25 – Rite Aid Corp. plans to improve its debt maturity profile through an exchange offer for $750 million of its 6 1/8% senior notes due 2023 and to eventually get rid of that 2023 maturity entirely.

“Today, we announced a transaction that furthers our ongoing efforts to address our debt maturity profile,” executive vice president and chief financial officer Matt Schroeder said on the company’s first quarter ended May 30 earnings conference call on Thursday.

“We are offering to exchange up to $750 million of our 6 1/8% senior notes due in 2023 for a combination of $600 million in new secured notes due in November 2026 and cash.

“This transaction will improve our debt maturity profile while maintaining ample liquidity and minimizing the overall impact to interest expense.

“Reducing our debt and improving our leverage ratio is critical, and we are taking steps to ensure that we achieve this goal, even in the face of unprecedented uncertainty,” he said.

The company hopes to eliminate the 2023 maturity entirely.

“If we get the full $750 million [of notes] that we’re shooting for in the exchange, we would have about $400 million left of those April 2023 notes, and our goal would certainly be to get out of those over a period of time,” Schroeder said.

“We’re pretty focused on trying to get our way out of that maturity all together,” he said.

The company is in good shape regarding its debt maturity profile, but leverage is expected to increase later this year before normalizing.

“With no debt maturing until 2023, we have the flexibility and the runway needed to execute our strategic initiatives,” Schroeder said.

“We do expect our leverage ratio to get worse in the second and third quarters of fiscal 2021 as the 2020 CMS receivable grows but then expect it to improve in the fourth quarter when we securitize that receivable,” he said.

Management is pleased with the company’s balance sheet.

“We have strong liquidity, expect to generate free cash flow this year and continue taking critical steps to address our debt maturities as reflected by our bond exchange announced this morning,” president and chief executive officer Heyward Donigan said on the call.

Cash and cash equivalents were $288,316,000 as of May 30, compared to $218.18 million as of Feb. 29.

Long-term debt, less current maturities, was $3,321,972,000 as of May 30, compared to $3,077,268,000 as of Feb. 29.

At the end of the quarter, the company’s leverage ratio was 5.7x and approximately $1.7 billion of liquidity.

On Thursday, the company said it has begun an exchange offer for up to $750 million principal amount of the 6 1/8% senior notes due 2023 (Cusip: 767754CH5) for newly issued 8% senior secured notes due 2026 plus cash.

Rite Aid is concurrently soliciting consents from holders of the old notes to adopt proposed amendments to the indenture governing the old notes for a separate cash consent payment.

The purpose of the exchange offer is to improve the company’s maturity profile by extending the maturity of a portion of the old notes to November 2026 from April 2023.

The exchange consideration is $760 of new notes plus $184 in cash. For notes tendered ahead of an early deadline, there is an additional $40 of new notes and $7.50 cash payment and $2.50 consent payment, for a total consideration of $800 of new notes and $194 in cash.

The effective result of this is that for each $1,000 of such old notes, $800 will be exchanged for new notes at par and $200 will be exchanged for cash at 97% of par.

The early deadline and consent solicitation expiry is 5 p.m. ET on July 9.

The company may extend the deadline for receiving the early tender payment without extending the consent deadline.

The exchange offer will expire at 11:59 p.m. ET on July 23.

The new notes will be secured by substantially all of the company’s subsidiaries’ assets, including a first-priority lien on the notes priority collateral, and a second-priority lien on the ABL priority collateral, which, in each case include assets of PBM entities other than insurance entities and also secure the company’s existing credit facilities and the 2025 notes.

In conjunction with the exchange offer, the company is soliciting consents to some amendments that would modify the debt and lien covenants to provide additional secured debt capacity by creating exemptions for the $600 million of outstanding 2025 notes and the new notes.

The adoption of the proposed amendments requires the consents of the holders of at least a majority of the outstanding principal amount of the old notes. If the requisite consents are received and the other conditions for the consent solicitation are satisfied or waived, Rite Aid will pay to each holder that validly delivers consent prior to the deadline $2.50 in cash per note.

Any holder, including a holder that is not an eligible holder under the exchange offer, is permitted to deliver a consent to the proposed amendments. Any eligible holder that tenders old n must also deliver the related consent.

Global Bondholder Service Corp. (866 470-3900, 212 430-3774, contact@gbsc-usa.com) is the information and exchange agent.

Rite Aid is a Camp Hill, Pa.-based drugstore chain.

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