Moody's on Oct. 15 downgraded Rite Aid Corp.'s corporate family rating to B3 from B2 and its probability of default rating to B3-PD from B2-PD.
The agency also changed the outlook to negative from under review.
The downgrade concludes the review that Moody's started in August, following Rite Aid's aborted merger deal with Albertsons Cos. Inc.
The agency said that the nixed merger placed the Rite Aid in a weaker position as it does not have the scale or balance sheet to effectively compete in the U.S. pharmacy industry against bigger competitors like CVS Health Corp. and Walgreens Boots Alliance Inc.
"Despite the debt reduction through the proceeds of the asset sales to Walgreens, the company's leverage remains high due to EBITDA erosion and free cash flow remains weak," Moody's Vice President Mickey Chadha said in a statement. "Rite Aid's operating performance has been weak in the last 18 to 24 months and it has a much weaker competitive position vis-à-vis its much larger andwell-capitalizedd competitors in an industry where scale is becoming increasingly important, hence the downgrade."
Moody's said the negative outlook reflects its uncertainty in the company's ability to turn around its operating performance and credit metrics in the next 12 to 18 months.
Moody's also said it can upgrade Rite Aid's ratings if it improves its operating performance, or reduce its absolute debt levels such that it can maintain debt/EBITDA below 5.5 times and EBIT to interest expense above 1.5 times.