Rite Aid debt structure pressured by Q1 results; Idearc, R.H. Donnelley continue to lose weight

By Stephanie N. Rotondo

Portland, Ore., June 26 - In what was termed an "ugly" day Thursday, the distressed bond market fell back into its old ways, ending lower overall.

The marketplace had tried to reverse its path on Wednesday as the equity markets rallied some. But a flurry of downgrades in the automotive and financial sectors, as well as a spike in oil prices, sent investors running for cover.

Rite Aid Corp.'s debt was one of the biggest losers of the day. The company released disappointing quarterly figures, which caused it capital structure to lose ground. The term loan fell about 4 points, while the corporate debt slipped about 5 points.

Meanwhile, Idearc Inc. and sector peer R.H. Donnelley remain on the decline. As the market tries to sort out what is causing the losses, some are opining that whatever it is - whether a decrease in advertising spending or a move to other mediums, or both - it is beyond management's control.

Q1 results pressure Rite Aid debt

Rite Aid saw its debt structure drop by as much as 5 points after the company announced its quarterly results, according to a trader.

The Camp Hill, Pa.-based company's existing term loan was quoted at 87 bid, 89 offered, down from 91 bid, 92 offered on Wednesday, a trader said. Among its corporate debt, the 7½% notes due 2017 fell to 82 bid, 83 offered, while the 9 3/8% notes due 2015 slipped to 67.5 bid, 68.5 offered, down 4 to 5 points over the session. Another source pegged the 9 3/8% notes around 68, and at another desk, the 8 5/8% notes due 2015 were seen down 5 points at 68 bid.

For the first quarter ended May 31, Rite Aid reported a net loss of $156.6 million, or $0.20 per diluted share, compared to last year's first-quarter net income of $27.6 million, or $0.04 per diluted share. The loss was attributed in part to increased expenses as a result of last year's Brooks Eckerd acquisition.

Revenues for the quarter were $6.61 billion, up 49.3% from revenues of $4.43 billion in the prior-year first quarter. This increase was also attributed to the Brooks Eckerd acquisition.

Adjusted EBITDA for the quarter was $236.4 million, or 3.6% of revenues, compared to $192.8 million, or 4.4% of revenues, last year.

"While the business environment remains challenging, we expect that completing the minor remodels, sales turning positive in the acquired stores and new pharmacy and front end initiatives will contribute significantly to strong results in the second half of the fiscal year," said Mary Sammons, chairman, president and chief executive officer, in a news release.

Also on Thursday, Rite Aid confirmed its fiscal 2009 guidance for sales, same-store sales, net loss, adjusted EBITDA and capital expenditures.

Sales for fiscal 2009 are expected to be between $26.7 billion and $27.2 billion with same-store sales expected to improve 2% to 4% over fiscal 2008.

Net loss for fiscal 2009 is expected to be between $260 million and $375 million or a loss per diluted share of $0.34 to $0.48.

Adjusted EBITDA for fiscal 2009 is expected to be between $1 billion and $1.1 billion.

And, capital expenditures for fiscal 2009, excluding proceeds from sale and leaseback transactions, are expected to be about $600 million. Proceeds from sale and leaseback transaction are expected to be about $150 million.

In addition, the company announced that it plans to offer $425 million of senior secured notes due 2016.

Proceeds from the notes, along with the $350 million senior secured tranche 3 term loan due June 4, 2014 that was launched to investors on June 12, will be used to fund the previously announced tender offers and consent solicitations related to the company's $360 million 8 1/8% senior secured notes due 2010, $200 million 7½% senior secured notes due 2015 and $150 million 9¼% senior notes due 2013 - which currently restrict the company's ability to borrow the full availability of its $1.75 billion revolver.

The tender offers are scheduled to expire on July 1. Rite Aid said the majority of holders of these issues have agreed to tender the securities.

The new term loan, being led by Citigroup and Bank of America, is talked at Libor plus 225 bps with a 3% Libor floor and an original issue discount of 94.

Obtaining the term loan is permitted under the accordion feature in the company's existing senior secured credit facility.

"This refinancing gives us greater flexibility to support our business plans in an environment that includes worries about a lengthy recession and continued uncertainty of the capital markets." Sammons added in the release.

Idearc, R.H. Donnelley losing ground

As the economy continues to struggle, companies small and large are tightening their belts - meaning advertising budgets are being cut. For phonebook publishers Idearc and R.H. Donnelley, that means the value of their debt is declining.

Fitch Ratings affirmed R.H. Donnelley's standing Thursday but said the outlook remained negative. The rating agency attributed the uneasiness to operating performance pressures and the related contraction in market multiples.

One trader said he "saw a lot of offers [in R.H. Donnelley paper] but not a lot of bid sides." He placed the 11¾% notes due 2015 at 98 offered, the 8 7/8% notes due 2016 at 61 offered - down from 63 offered in the previous session - and the 8 7/8% notes due 2013 at 91 offered.

The trader also saw Idearc's 8% notes due 2016 at 62 bid, 64 offered. Another trader placed the debt in that range at 63, which he called "down a couple more points." Another source pegged the notes at 63.5 bid, down 1.25 points.

In recent weeks, both companies have racked up slow, but steady losses. With no real news out to prompt the move, it has been unclear what the root of the problem is.

But some market sources are claiming that it is simply a matter of bad business. One buyside source, who had been involved in the name but is no longer, said he was "afraid to go anywhere near it now."

"It is a tough time for traditional media companies," he said, citing a decrease in advertising spending and a migration to other mediums, such as the internet.

Yellow-page directories have historically been a place where businesses could advertise on the cheap. The audience was phenomenal - "Who doesn't have a yellow pages in their kitchen?" the trader said.

But with the growth of the internet, the allure of the yellow page has dissipated.

"There are so many more alternatives, it has taken the usefulness out of the product," the source said.

The source also said that he believes the shift in the business is outside of management's control.

"It was such as easy, steady business," he said. Though profit margins were never earth shattering, the cash flow was steady, he added.

"It is such an easy business that you can't screw this up," he said. "It has to be something outside management's sphere of influence."

Still, "I was surprised that their decline was this fast and this dramatic," he said.

Broad market weaker

Neff Corp.'s 10% notes due 2015 ended the day lower around 39.

Aventine Renewable Energy Holdings' 10% notes due 2017 closed at 62, while VeraSun Energy's 9 3/8% notes due 2017 were offered at 54, looking for a bid, a trader said.

There was "not a lot of action" in WCI Communities Inc.'s debt, a trader said, after the company's convertible noteholders said they would exercise their repurchase option. The trader said the 7 7/8% notes due 2013 were offered at 41.25.

Tropicana Entertainment LLC's 9 5/8% notes due 2014 slipped to 47.5 from the low-50s.

Delphi Corp.'s bonds continue to lose weight, as a trader pegged the bonds generically at 26 bid, 27 offered.

Quebecor Inc.'s paper was "not all that active," a trader said, though it was weaker. The trader said the 6 1/8% notes due 2013 and the 4 7/8% notes due 2008 "traded into the high-30s" from around 42 previously.

Level 3 Communications Inc.'s bonds "look like they held up" in an otherwise weaker marketplace, a trader said. He called the debt just slightly lower, the 8¾% notes due 2017 at 86 bid, 86.5 offered and the 9¼% notes due 2014 at 91.

Level 3 will release its second-quarter results on July 24.

Sara Rosenberg contributed to this article.

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