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Fitch affirms Rite Aid's ratings following merger termination; outlook negative

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Fitch affirms Rite Aid's ratings following merger termination; outlook negative

Fitch Ratings on Aug. 9 affirmed Rite Aid Corp.'s issuer default rating at B and removed its ratings from Watch Evolving a day after the company called off its merger with grocery retailer Albertsons Cos. Inc. The outlook is negative.

Rite Aid and the Idaho-based grocer terminated the deal amid opposition from advisory firms and shareholders.

Fitch also affirmed the Pennsylvania-based pharmacy chain's secured revolving credit facility at BB/RR1, upgraded the guaranteed senior unsecured notes to BB/RR1 from B/RR4 and upgraded the non-guaranteed senior unsecured notes to B/RR4 from CCC+/RR6.

The agency said the ratings reflect the company's weak position in the U.S. drug retail business, as well as its high adjusted leverage projected and negative projected free cash flow. The ratings also consider the company's liquidity, based on its valuable asset base of prescription files, inventory and receivables.

The negative outlook is a result of the rating agency's reduced confidence in Rite Aid's ability to stabilize sales and EBITDA trends, particularly given concerns around margin structures and the threat of new entrants.

Fitch noted that Rite Aid's smaller size compared to Walgreens Boots Alliance Inc. and CVS Health Corp. may negatively impact its ability to compete for inclusion in pharmaceutical contracts.

Fitch estimates Rite Aid's EnvisionRx business, which it acquired in 2015, will generate approximately one-third of total EBITDA after the completion of store divestitures to Walgreens.

The rating agency expects annualized EBITDA in the range of $500 million, while revenue is expected to remain steady near $21 billion on flat comparable sales and minimal store count change. Margins are projected to trend in the mid-2% range.

Fitch expects free cash flow in 2018 to be in the negative $100 million to negative $150 million range on higher working capital, and subsequently improve to the negative $25 million to negative $50 million range from 2019. Fitch said adjusted leverage could trend in the mid-7.0x after store divestitures and related debt reduction of approximately $4 billion.

The company's pro forma revenue is expected around $21 billion in 2018 after the transaction with Walgreens. Rite Aid's total debt is projected to trend in the mid-$3 billion range, following around $4 billion of debt reduction using proceeds from the sale of its stores.