Moody's upgrades Rite Aid, rates notes B2, loan B1

Moody's Investors Service upgraded Rite Aid Corp. and assigned a B1 rating to its planned $2 billion secured bank facility and a B2 rating to its new $350 million seven-year second lien senior secured notes. Ratings upgraded include Rite Aid's $1.9 billion old secured bank facility, raised to B1 from B2, $300 million 9.5% second-lien senior secured notes due 2011, raised to B2 from B3 and $1.9 billion of senior notes, raised to Caa2 from Caa3. The speculative-grade liquidity rating was confirmed at SGL-3. The outlook is stable.

Moody's said the upgrade was in response to management's consistent achievement of the revenue and cash flow objectives it has set to turn around the company's performance and the financial flexibility and liquidity provided by the new debt structure, given that the revolving credit facility will be undrawn except for letters of credit.

The ratings recognize the recent momentum that the company has developed in improving liquidity and year-over-year cash flow, management's consistent track record at achieving operational and financial targets, and the steady progress at resolving the outstanding civil and criminal issues, Moody's added.

As the third largest drug store chain and retailer of about 6% of the prescription drugs dispensed in the U.S., potential scale advantages in purchasing, marketing, and information technology and the importance of Rite Aid in the nation's health care system also benefit Moody's perception of the company.

However, the ratings continue to reflect the importance of further operating improvement since leverage remains very high and fixed charge coverage remains low, the weak performance at a significant fraction of stores, and the long-term loss of retail prescription market share, Moody's said.

The continuing performance differential between the company and its higher rated peers Walgreen (senior unsecured Aa3) and CVS (senior unsecured A2), as well as Moody's belief that store repair and maintenance should eventually equal depreciation, also heighten the operating challenges that confront Rite Aid.

For the new loan, the B1 reflects that Moody's anticipates lenders would achieve full recovery in a distress scenario.

For the fiscal year ending March 1, 2003, lease adjusted leverage exceeded 7 times and fixed charge coverage was only 0.9 times, Moody's said. EBITDA margin for the year ending March 1, 2003 improved to 3.8% compared to 3.0% in the prior fiscal year.

S&P puts Cummins on watch

Standard & Poor's put Cummins Inc. on CreditWatch with negative implications including its senior secured bank loan and senior unsecured notes at BB+ and trust preferreds at B+.

S&P said the watch listing reflects Cummins' large and growing unfunded pension and postretirement obligations. In addition, credit protection measures are somewhat weak for the rating category at the present time, because of weak operating results caused by soft market fundamentals, especially in power generation.

At the end of 2001, the company's unfunded pension liability was approximately $380 million, S&P said. During 2002, the company took a charge to equity of approximately $257 million associated with this underfunding. The company has indicated that total pension funding for 2003 is expected to be around $105 million.

In addition to the company's pension liabilities, Cummins continues to experience very weak market conditions in the U.S., especially in power generation, and the company's heavy-duty truck engine business is expected to remain soft over the near term, S&P added. As a result, operating results for full-year 2003 may be below previously expected levels.

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