Rite Aid Corporation
CASE SUMMARY: Rite Aid Aims to ‘Significantly’ Right-Size Balance Sheet, Rationalize Lease Portfolio Through Dual-Track Comprehensive Restructuring Under RSA With Second Lien Noteholders; March 2024 Emergence Targeted
Mon 10/16/2023 11:48 AM
Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion / Liebman Declaration / Scheidemann Declaration
Chapter 11 Plan / Disclosure Statement
McKesson Adversary Complaint
Lease Rejection Motion / GOB Sales Motion / Liebman Declaration
Bidding Procedures Motion / Frejka Declaration / Rifkin Declaration / Cohen Declaration
First Day Hearing Agenda
The RSA and plan generally contemplate a reorganization-based restructuring under which the claims of second lien noteholders would be equitized into 100% of Rite Aid’s new common stock, subject to dilution by fully diluted management incentive plan shares and any equity issued to holders of allowed general unsecured claims, in exchange for cancellation of debt under a chapter 11 plan, plus take-back debt.
Prepetition ABL facility claims and FILO term claims would either be paid in full in cash or reinstated under applicable exit facilities. Holders of general unsecured claims, which includes unsecured noteholders and any second lien notes deficiency claim, would receive an as-yet undetermined equity-based recovery. Projected recovery metrics for creditor classes have not yet been disclosed. Existing equity would be canceled and extinguished, with no recovery for such holders.
The RSA and plan further contemplate a dual-track sale process for Rite Aid’s retail assets in order to determine whether a transaction superior to the equitization restructuring exists in the marketplace. Sale alternatives to the plan would include either a credit bid purchase by the second lien noteholders or an “Alternative Sale Transaction (or a series of such Sale Transactions)” to a third party or third parties. The secured noteholders’ agreement to credit bid in the RSA term sheet is subject to several conditions related to inventory, liquidity, exit financing and key vendor relationships. Recoveries under a sale scenario are contingent upon the outcome of the sale process.
In either case, Rite Aid would be going forward with a reduced footprint, as “Rite Aid 2.0.” The documents repeatedly emphasize that “Rite Aid is open for business and will continue to meet customers’ health care needs.”
In addition to the broader sale process, the debtors reached an agreement with MedImpact to act as stalking horse bidder in a 363 sale for Rite Aid’s Elixir pharmacy benefit manager assets. According to the APA attached to the bid procedures motion, Medimpact would pay an aggregate consideration of $575 million in cash, subject to adjustments that are primarily working capital and tax in nature, and assume certain liabilities. The RSA and plan propose a Nov. 20 auction and a Dec. 7 sale hearing.
As part of their restructuring efforts, the debtors have secured commitments for $3.45 billion in aggregate DIP financing provided by existing first lien lenders with agent Bank of America, comprising:
The proceeds of the DIP ABL revolver would be used for working capital needs. The DIP ABL financing contains a creeping rollup feature under which outstanding prepetition revolver facility obligations will be rolled up on an incremental, “creeping basis” and be converted to DIP revolver obligations pending entry of a final order.
The proceeds of the DIP FILO facility would refinance the debtors’ outstanding $400 million prepetition FILO facility obligations in full upon entry of the interim order.
The DIP term loan facility new-money proceeds will be used to fund business operations and pay chapter 11 administrative costs, among other things.
The proposed DIP orders also provide for the debtors’ consensual use of their prepetition secured parties’ cash collateral.
Holders of DIP ABL claims would receive, under an equitization restructuring, ratable portions of any exit ABL facility or, under a sale, either payment in full in cash or ratable portions of the exit ABL facility. DIP term loan claims would be paid in full in cash on the plan effective date.
Key RSA milestones comprise:
In addition to a TRO and preliminary injunction, the complaint requests a declaration that McKesson’s Oct. 14 termination letter did not terminate the supply agreement, and the supply agreement remains in full force and effect. The complaint also seeks an injunction against McKesson requiring the company to continue performance under the supply agreement until the effective date of the debtors’ plan of reorganization or upon further order of the court.
The first day hearing is scheduled for today, Monday, Oct. 16, at 1 p.m. ET.
The petition estimates that the debtors have $1 billion to $10 billion in both assets and liabilities. As of June 3, the debtors report $7.65 billion of total assets and $8.598 billion in total liabilities, according to the petition.
Prepetition Capital Structure
The company’s prepetition capital structure includes the following:
Secured Debt
Rite Aid Corp. is the borrower on the ABL and FILO loan with Bank of America acting as the administrative and collateral agent. The facilities were last amended on Dec. 1, 2022.
The credit agreement provides for a senior secured ABL revolving credit facility with a maximum availability of $2.85 billion. Approximately $2.2 billion in aggregate principal amounts remain outstanding. Under the same agreement, the company borrowed $400 million in the form of a FILO term loan, all of which is currently outstanding. The facilities mature on Aug. 20, 2026.
The ABL has priority claims on typical ABL collateral including accounts receivable and inventory. In addition, collateral for the ABL and FILO loans includes intellectual property.
The company also has two tranches of secured notes outstanding:
The senior secured notes have a second lien on the ABL priority collateral and a first lien on equipment, fixtures and investment property of the parent and subsidiary guarantors.
Unsecured Debt
Rite Aid Corp. issued two tranches of unguaranteed unsecured notes:
The cases have been assigned to Chief Judge Michael B. Kaplan (case No. 23-18993). The debtors are advised by Kirkland & Ellis and Cole Schotz as bankruptcy counsel, Guggenheim Partners as investment banker and Alvarez & Marsal as restructuring advisor. Wilson Sonsini Goodrich & Rosati is counsel to the Rite Aid Corp. board. Kobre & Kim is counsel to the disinterested directors of Rite Aid Corp. Katten Muchin Rosenman is counsel to the disinterested directors of Hunter Lane and Milbank is counsel to the disinterested directors of Thrifty PayLess Inc. Kroll is the claims and noticing agent.
Background / Events Leading to Bankruptcy Filing
Rite Aid operates more than 2,100 retail pharmacies in 17 states and generated more than $24 billion in revenue in fiscal year 2023. The company has more than 45,000 employees and fills about 200 million prescriptions per year. About 14,000 of the company’s employees are unionized under 18 collective bargaining agreements. The company also contributes to ten multiemployer defined benefit pension plans under the terms of certain CBAs.
The company manages pharmacy benefits for more than one million members through pharmacy benefit manager Elixir.
Rite Aid “relies primarily” on distributor McKesson to fulfill prescriptions. McKesson accounts for 98% of the dollar volume of the company’s prescription drugs in the retail pharmacy segment.
Rite Aid had a “troubled period” in the late 1990s when the U.S. Securities and Exchange Commission and U.S. Attorney for the Middle District of Pennsylvania investigated Rite Aid and former senior executives pleaded guilty in criminal proceedings. At that time, the company also “struggled to integrate recent acquisitions, particularly that of Thrifty PayLess,” had a “$6-plus billion debt load” and restated earnings for prior years in 1999. The company “negotiated a deal with its creditors to avoid bankruptcy,” the first day declaration continues, after which the company began to expand the business.
Rite Aid bought the Brooks and Eckerd drugstore chains in 2007, Health Dialog in 2024, what is now known as Elixir in 2015 and Bartell Drugs in 2020.
In 2015, Walgreens announced it would acquire Rite Aid for $17.2 billion, but the parties determined not to move forward because of regulatory issues. However, the U.S. Federal Trade Commission ultimately approved an agreement for Walgreens to purchase 1,932 stores (about half of Rite Aid’s stores) and three distribution centers for $4.38 billion, and the sale closed in March 2018. Also in 2018, Rite Aid and Albertson Cos. announced but ultimately terminated a merger of the remaining Rite Aid stores.
The company attributes the bankruptcy filing to onerous debt service obligations, with $4 billion in funded debt that carries $200 million in annual interest payments that have hindered Rite Aid’s ability to execute on turnaround initiatives and in-store investments. Rite Aid also points to “record inflation,” increased labor costs, declining reimbursement rates from third-party payors, reduced demand for front-end merchandise and Covid-19 vaccines, “increased shrink costs that are also impacting the rest of the industry” and losing “key” accounts at pharmacy benefit manager Elixir.
Rite Aid notes that it operates unprofitable stores with $80 million annual “dead rent” that it intends to exit via chapter 11 lease rejections. The company adds it is “heavily reliant on trade credit, and as restructuring-related rumors have swirled, trade terms contracted” and vendors “increasingly” demanded security deposits and cash-on-delivery or cash-in-advance for goods, resulting in a loss of more than $100 million in liquidity in September and early October.
Rite Aid is also facing more than 1,600 opioid-related litigations, “significant” contract disputes, government investigations and securities claims. This “extensive litigation portfolio,” the debtors say, is costly to manage, has impacted liquidity, requires “substantial” time and attention from key executives and has also negatively affected the company’s ability to explore out-of-court alternatives.
Apart from these operational and macroeconomic issues, Rite Aid says it operates in a very competitive “pharma-retail space,” with competition from “much bigger” retail drugstore chains such as CVS and Walgreens, independent drugstores, supermarkets such as Kroger and mass merchandisers like Walmart and Target. Rite Aid also faces competition from online retailers and pharmacies Amazon and Capsule, which according to the first day declaration have different cost structures.
Rite Aid has taken measures to combat these issues, including:
Rite Aid has also made changes with respect to corporate governance, including appointing a special committee of the board to focus on restructuring, retention of various individuals as advisor consultants over the summer to evaluate alternatives and “contingency planning efforts.” The company ultimately appointed advisor consultants to disinterested director positions.
The company’s organizational structure is HERE.
The debtors’ largest unsecured creditors are as follows:
The case representatives are as follows:
DIP Financing Motion
Bank of America is the DIP agent, with certain prepetition first lien lenders serving as the DIP lenders. The DIP $3.45 billion in commitments are allocated as follows: a $2.85 billion DIP ABL revolver, a $400 million DIP FILO facility and a $200 million DIP term loan facility. The facility matures one year after the closing date.
The proceeds of the DIP loans will be used in accordance with the budget for working capital needs and for general corporate purposes.
The DIP facility is priced as follows:
The DIP financing contains a rollup of prepetition obligations that is structured as follows: (a) upon entry of an interim order, the repayment and refinancing of all prepetition FILO loans with proceeds of the rollup DIP FILO loans and (b) the repayment and refinancing of the prepetition revolving loans as set forth in the DIP ABL credit agreement and the interim order, including the application of all collections on account of DIP ABL priority collateral to the outstanding principal balance of the prepetition revolving loans, thereby creating a dollar-for-dollar increase in “ABL Availability,” as defined in the DIP ABL credit agreement.
On an interim basis, there would be a “creeping” rollup of the prepetition revolving loans, and upon entry of the final order, an extension of the DIP revolving loans to repay and refinance any remaining outstanding prepetition revolving loans.
To secure the DIP ABL liens, the debtors propose to grant liens on all DIP shared collateral. To secure the DIP term loan, the debtors propose to grant liens on all the DIP shared collateral and any DIP term loan exclusive collateral.
DIP shared collateral is defined as the debtors’ interests in assets and properties other than DIP term loan exclusive collateral. The DIP term loan exclusive collateral means the debtors’ interest in the following assets and properties:
The debtors include the following lien priority chart:
The facility has various fees, including:
The company proposes the following adequate protection to its prepetition lenders: replacement liens (including proceeds of avoidance actions subject to a final order), subject to lien priority, allowed superpriority administrative expense claims and payment of professionals’ fees and expenses.
The DIP facilities also require the DIP borrowers to provide periodic reports to the DIP agents and their respective professionals regarding the budget, consolidated financial statements of the DIP borrowers, key performance reports, and summaries of accounts payable.
In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b].
The post-termination carve-out for professional fees is $20 million.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
The lien challenge deadline is 75 days after entry of an interim DIP order, or if a UCC is appointed, 60 days after its appointment. The UCC lien investigation budget is $100,000.
Bidding Procedures Motion
The debtors seek approval of bid procedures for their noncore pharmacy benefit manager business Elixir, primarily owned by debtor Hunter Lane LLC and its debtor and nondebtor subsidiaries, which they say is a “cornerstone of the broader restructuring transactions envisioned through these chapter 11 cases, and will provide crucial recoveries to the estate while the Debtors focus solely on their renewed and rationalized core retail business plan.” The debtors have secured “committed strategic bidder” MedImpact Healthcare Systems Inc. as stalking horse for a cash payment of $575 million plus the assumption of certain liabilities.
The debtors are also seeking authority to sell all or a portion of their remaining assets consisting largely of their core retail pharmacy business.
The Elixir marketing process began in early July, and the retail assets marketing process began prepetition, pursuant to which 12 parties have executed or are negotiating confidentiality agreements.
The bid protections consist of a 3.5% aggregate amount for a breakup fee and expense reimbursement with respect to the Elixir sale transaction, and 3% of the applicable purchase price for a Rite Aid retail sale transaction. Subsequent overbids at auction would need to represent a 2% increase in cash or cash equivalents.
The proposed sale timeline is as follows:
In support of the bid procedures, the debtors submitted the declarations of Elise Frejka of Frejka PLLC, special counsel to the debtors with respect to safeguarding personally identifiable information, Adam Rifkin of Guggenheim who details the retail marketing process, the debtors’ proposed investment banker, and Casey Cohen of Guggenheim who details the Elixir process.
The debtors also filed a motion to conduct store closing sales at 154 stores as shown HERE, and seek authority to conduct store closings at additional stores to be determined. Prepetition, the debtors say that in connection with prepetition store closures, they either transferred prescription assets to nonclosing company stores or sold closing stores’ prescription assets to one or more non-Rite Aid pharmacies on a confidential basis, “with such sale transactions averaging $0.8 million per sale.” Through the motion, the debtors “seek authority to continue Sales and internal transfers of Prescription Assets on a confidential basis consistent with their past practice.”
Lease Rejection Motion
The debtors state that a “key component” of the company’s go-forward business plan is “the continuation and completion of the Debtors’ ongoing effort to rationalize their retail pharmacy store footprint.” During the LTM period ended Sept. 30, the debtors reduced their store footprint by about 210 stores, leaving the debtors with about 2,100 stores as of the petition date. The debtors’ lease rejection motion includes a schedule with 347 lease locations to be rejected upon the petition date. According to cleansing materials discussed below, Rite Aid’s current store portfolio includes approximately 150 pre-allocation EBITDA negative stores and approximately 400 retail EBITDA negative stores. A breakdown of the debtors’ store portfolio is below:
Plan / Disclosure Statement
Classification and Treatment of Claims and Interests
Below is a chart of the plan’s classes, along with their impairment status and voting rights:
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
The disclosure statement does not include a valuation analysis, financial projections or liquidation analysis.
Other Plan Provisions
The plan tentatively provides for releases of the debtors, the reorganized debtors, the wind-down debtors, all releasing parties and their current and former directors, managers, officers, investment committee members, special committee members, equityholders, predecessors, participants, successors, assigns, subsidiaries, partners, limited partners, general partners, principals, members, management companies, fund advisors or managers, employees, agents, trustees, advisory board members, financial advisors, attorneys, accountants, investment bankers, consultants, representatives and other advisors.
The plan notes that the proposed releases “remain subject to the outcome of any ongoing diligence efforts of the disinterested directors at the applicable Debtor Entities.”
Creditors and equityholders may opt out of the releases.
Cleansing Materials
The debtors in an 8-K filing publicly disclosed cleansing materials pursuant to confidentiality agreements with certain secured noteholders entered in August and September. The following projections are provided in the materials:
The company states that, in addition to footprint rationalization, it “has developed plans for additional cost rationalization of ~$168MM.”
Additionally, the cleansing materials include the following monthly liquidity projections:
The debtors included the following detail on Rite Aid’s owned real estate:
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
First Day Declaration
DIP Financing Motion / Liebman Declaration / Scheidemann Declaration
Chapter 11 Plan / Disclosure Statement
McKesson Adversary Complaint
Lease Rejection Motion / GOB Sales Motion / Liebman Declaration
Bidding Procedures Motion / Frejka Declaration / Rifkin Declaration / Cohen Declaration
First Day Hearing Agenda
| Summary |
| Retail pharmacy operator chapter 11 premised on RSA with second lien noteholders contemplating either an equitization restructuring or a sale |
| $3.45 billion proposed aggregate DIP facility to be provided by existing first lien lenders and would fund operations, pay chapter 11 costs and refinancing of prepetition revolver and FILO facilities |
| Seeks to significantly reduce retail store footprint and address potential litigation liabilities |
Rite Aid Corp., a Philadelphia-based operator of more than 2,000 retail pharmacy locations and a nationwide pharmacy benefits management business, and numerous affiliates filed for chapter 11 last night, Sunday, Oct. 15, in the U.S. Bankruptcy Court for the District of New Jersey. The debtors filed with a restructuring support agreement entered into with an ad hoc secured second lien noteholder group represented by Paul Weiss, Evercore and FTI Consulting. They also filed a chapter 11 plan and disclosure statement. The term sheet outlining the RSA is attached to the first day declaration of CEO and Chief Restructuring Officer Jeffrey S. Stein.
The RSA and plan generally contemplate a reorganization-based restructuring under which the claims of second lien noteholders would be equitized into 100% of Rite Aid’s new common stock, subject to dilution by fully diluted management incentive plan shares and any equity issued to holders of allowed general unsecured claims, in exchange for cancellation of debt under a chapter 11 plan, plus take-back debt.
Prepetition ABL facility claims and FILO term claims would either be paid in full in cash or reinstated under applicable exit facilities. Holders of general unsecured claims, which includes unsecured noteholders and any second lien notes deficiency claim, would receive an as-yet undetermined equity-based recovery. Projected recovery metrics for creditor classes have not yet been disclosed. Existing equity would be canceled and extinguished, with no recovery for such holders.
The RSA and plan further contemplate a dual-track sale process for Rite Aid’s retail assets in order to determine whether a transaction superior to the equitization restructuring exists in the marketplace. Sale alternatives to the plan would include either a credit bid purchase by the second lien noteholders or an “Alternative Sale Transaction (or a series of such Sale Transactions)” to a third party or third parties. The secured noteholders’ agreement to credit bid in the RSA term sheet is subject to several conditions related to inventory, liquidity, exit financing and key vendor relationships. Recoveries under a sale scenario are contingent upon the outcome of the sale process.
In either case, Rite Aid would be going forward with a reduced footprint, as “Rite Aid 2.0.” The documents repeatedly emphasize that “Rite Aid is open for business and will continue to meet customers’ health care needs.”
In addition to the broader sale process, the debtors reached an agreement with MedImpact to act as stalking horse bidder in a 363 sale for Rite Aid’s Elixir pharmacy benefit manager assets. According to the APA attached to the bid procedures motion, Medimpact would pay an aggregate consideration of $575 million in cash, subject to adjustments that are primarily working capital and tax in nature, and assume certain liabilities. The RSA and plan propose a Nov. 20 auction and a Dec. 7 sale hearing.
As part of their restructuring efforts, the debtors have secured commitments for $3.45 billion in aggregate DIP financing provided by existing first lien lenders with agent Bank of America, comprising:
- A senior secured superpriority $3.25 billion ABL facility, consisting of a $2.85 billion ABL revolver and a $400 million FILO facility, provided by the DIP ABL lenders; and
- A $200 million new-money term loan facility, provided by the DIP term loan lenders, which comprise a subset of the debtors’ prepetition ABL lenders, all of which is being sought for approval on an interim basis.
The proceeds of the DIP ABL revolver would be used for working capital needs. The DIP ABL financing contains a creeping rollup feature under which outstanding prepetition revolver facility obligations will be rolled up on an incremental, “creeping basis” and be converted to DIP revolver obligations pending entry of a final order.
The proceeds of the DIP FILO facility would refinance the debtors’ outstanding $400 million prepetition FILO facility obligations in full upon entry of the interim order.
The DIP term loan facility new-money proceeds will be used to fund business operations and pay chapter 11 administrative costs, among other things.
The proposed DIP orders also provide for the debtors’ consensual use of their prepetition secured parties’ cash collateral.
Holders of DIP ABL claims would receive, under an equitization restructuring, ratable portions of any exit ABL facility or, under a sale, either payment in full in cash or ratable portions of the exit ABL facility. DIP term loan claims would be paid in full in cash on the plan effective date.
Key RSA milestones comprise:
- Oct. 17, 2023: Deadline for entry of global bidding procedures order, interim DIP order, interim store closing order and confirmation scheduling order;
- Nov. 16.: Deadline for entry of final DIP order, final store closing order, first lease rejection order and bar date order;
- Dec. 7: Deadline for entry into agreed form of credit-bid APA among the debtors and the consenting noteholders;
- Jan. 8, 2024: Deadline to file sale motion (regardless of whether parties are still seeking to complete the reorganization-based restructuring as of that date);
- Jan. 14: Deadline for entry of order approving DS;
- Feb. 19: Deadline for entry of chapter 11 plan confirmation order; and
- Feb. 26: Deadline for entry of sale approval order if either the reorganization plan conditions are not satisfied or the plan conditions are satisfied but the plan is not confirmed, in each case on or before Feb. 19.
In addition to a TRO and preliminary injunction, the complaint requests a declaration that McKesson’s Oct. 14 termination letter did not terminate the supply agreement, and the supply agreement remains in full force and effect. The complaint also seeks an injunction against McKesson requiring the company to continue performance under the supply agreement until the effective date of the debtors’ plan of reorganization or upon further order of the court.
The first day hearing is scheduled for today, Monday, Oct. 16, at 1 p.m. ET.
The petition estimates that the debtors have $1 billion to $10 billion in both assets and liabilities. As of June 3, the debtors report $7.65 billion of total assets and $8.598 billion in total liabilities, according to the petition.
Prepetition Capital Structure
The company’s prepetition capital structure includes the following:
Secured Debt
Rite Aid Corp. is the borrower on the ABL and FILO loan with Bank of America acting as the administrative and collateral agent. The facilities were last amended on Dec. 1, 2022.
The credit agreement provides for a senior secured ABL revolving credit facility with a maximum availability of $2.85 billion. Approximately $2.2 billion in aggregate principal amounts remain outstanding. Under the same agreement, the company borrowed $400 million in the form of a FILO term loan, all of which is currently outstanding. The facilities mature on Aug. 20, 2026.
The ABL has priority claims on typical ABL collateral including accounts receivable and inventory. In addition, collateral for the ABL and FILO loans includes intellectual property.
The company also has two tranches of secured notes outstanding:
- 7.5% senior secured notes due 2025. In February 2020, Rite Aid Corp. issued $600 million of 7.5% senior secured notes due July 1, 2025. Approximately $320 million remains outstanding;
- 8% senior secured notes due 2026. In July 2020, Rite Aid Corp. issued $850 million of 8% senior secured notes due Nov. 15, 2026, all of which remains outstanding.
The senior secured notes have a second lien on the ABL priority collateral and a first lien on equipment, fixtures and investment property of the parent and subsidiary guarantors.
Unsecured Debt
Rite Aid Corp. issued two tranches of unguaranteed unsecured notes:
- 7.7% notes due 2027. $300 million of 7.7% of notes due Feb. 15, 2027. Approximately $186 million remains outstanding;
- 6.875% notes due 2028. Issued in December 1998. Approximately $2 million remains outstanding.
The cases have been assigned to Chief Judge Michael B. Kaplan (case No. 23-18993). The debtors are advised by Kirkland & Ellis and Cole Schotz as bankruptcy counsel, Guggenheim Partners as investment banker and Alvarez & Marsal as restructuring advisor. Wilson Sonsini Goodrich & Rosati is counsel to the Rite Aid Corp. board. Kobre & Kim is counsel to the disinterested directors of Rite Aid Corp. Katten Muchin Rosenman is counsel to the disinterested directors of Hunter Lane and Milbank is counsel to the disinterested directors of Thrifty PayLess Inc. Kroll is the claims and noticing agent.
Background / Events Leading to Bankruptcy Filing
Rite Aid operates more than 2,100 retail pharmacies in 17 states and generated more than $24 billion in revenue in fiscal year 2023. The company has more than 45,000 employees and fills about 200 million prescriptions per year. About 14,000 of the company’s employees are unionized under 18 collective bargaining agreements. The company also contributes to ten multiemployer defined benefit pension plans under the terms of certain CBAs.
The company manages pharmacy benefits for more than one million members through pharmacy benefit manager Elixir.
Rite Aid “relies primarily” on distributor McKesson to fulfill prescriptions. McKesson accounts for 98% of the dollar volume of the company’s prescription drugs in the retail pharmacy segment.
Rite Aid had a “troubled period” in the late 1990s when the U.S. Securities and Exchange Commission and U.S. Attorney for the Middle District of Pennsylvania investigated Rite Aid and former senior executives pleaded guilty in criminal proceedings. At that time, the company also “struggled to integrate recent acquisitions, particularly that of Thrifty PayLess,” had a “$6-plus billion debt load” and restated earnings for prior years in 1999. The company “negotiated a deal with its creditors to avoid bankruptcy,” the first day declaration continues, after which the company began to expand the business.
Rite Aid bought the Brooks and Eckerd drugstore chains in 2007, Health Dialog in 2024, what is now known as Elixir in 2015 and Bartell Drugs in 2020.
In 2015, Walgreens announced it would acquire Rite Aid for $17.2 billion, but the parties determined not to move forward because of regulatory issues. However, the U.S. Federal Trade Commission ultimately approved an agreement for Walgreens to purchase 1,932 stores (about half of Rite Aid’s stores) and three distribution centers for $4.38 billion, and the sale closed in March 2018. Also in 2018, Rite Aid and Albertson Cos. announced but ultimately terminated a merger of the remaining Rite Aid stores.
The company attributes the bankruptcy filing to onerous debt service obligations, with $4 billion in funded debt that carries $200 million in annual interest payments that have hindered Rite Aid’s ability to execute on turnaround initiatives and in-store investments. Rite Aid also points to “record inflation,” increased labor costs, declining reimbursement rates from third-party payors, reduced demand for front-end merchandise and Covid-19 vaccines, “increased shrink costs that are also impacting the rest of the industry” and losing “key” accounts at pharmacy benefit manager Elixir.
Rite Aid notes that it operates unprofitable stores with $80 million annual “dead rent” that it intends to exit via chapter 11 lease rejections. The company adds it is “heavily reliant on trade credit, and as restructuring-related rumors have swirled, trade terms contracted” and vendors “increasingly” demanded security deposits and cash-on-delivery or cash-in-advance for goods, resulting in a loss of more than $100 million in liquidity in September and early October.
Rite Aid is also facing more than 1,600 opioid-related litigations, “significant” contract disputes, government investigations and securities claims. This “extensive litigation portfolio,” the debtors say, is costly to manage, has impacted liquidity, requires “substantial” time and attention from key executives and has also negatively affected the company’s ability to explore out-of-court alternatives.
Apart from these operational and macroeconomic issues, Rite Aid says it operates in a very competitive “pharma-retail space,” with competition from “much bigger” retail drugstore chains such as CVS and Walgreens, independent drugstores, supermarkets such as Kroger and mass merchandisers like Walmart and Target. Rite Aid also faces competition from online retailers and pharmacies Amazon and Capsule, which according to the first day declaration have different cost structures.
Rite Aid has taken measures to combat these issues, including:
- A 2020 exchange of senior notes due 2023 for senior secured notes due 2026, a 2021 redemption of certain outstanding notes at par and a series of cash tender offers in 2022 for outstanding notes;
- A paydown of approximately $280 million of second lien notes due 2025, $52 million of unsecured notes due 2027 and $27 million of unsecured notes due 2028;
- Various cost-saving measures and operational improvements, including closing more than 200 underperforming stores, reorganization of the executive management team, mixing up front-end retail offerings to “free up working capital and refresh its merchandise assortment and changing pricing and promotional strategies”;
- With “favorable real estate markets in each of 2021, 2022, and 2023,” Rite Aid entered into sale-leaseback transactions by selling dozens of owned properties, including distribution centers, and entering into long-term leases, resulting in net proceeds of approximately $178 million in 2021, $57 million in 2022, and $73 million in 2023;
- Rite Also engaged restructuring professionals beginning in December 2022, including Guggenheim Securities, Kirkland & Ellis and Alvarez & Marsal;
- Rite Aid developed a business plan over the summer - “Rite Aid 2.0” - which it says shows “meaningful promise,” projecting a 25% increase in adjusted EBITDA by FY 2025, right-sizing the balance sheet and strengthening the company’s “credit profile by equitizing or discharging certain existing funded debt,” and identifying stores for closure to allow a focus on the remaining portfolio;
- The company began a marketing process through Guggenheim for Elixir, which would continue in chapter 11, and also launched a marketing process for the retail business; and
- The company engaged with an ad hoc group of second lien noteholders on “options to strengthen its balance sheet and right-size its capital structure,” the senior ABL facility agent on potential financing options and various governmental agencies and litigation claimants regarding the consensual resolution of several investigations and claims.
Rite Aid has also made changes with respect to corporate governance, including appointing a special committee of the board to focus on restructuring, retention of various individuals as advisor consultants over the summer to evaluate alternatives and “contingency planning efforts.” The company ultimately appointed advisor consultants to disinterested director positions.
The company’s organizational structure is HERE.
The debtors’ largest unsecured creditors are as follows:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| McKesson Corp. | Irving, Texas | Trade | $ 667,570,707 |
| U.S. Bank Trust NA |
Wilmington, Del. | 7.7& Notes Due February 2027 |
199,691,000 |
| Humana Health Plan Inc. |
Washington | Litigation | 136,832,724 |
| Loyd F. Schmuckley Jr., Relator |
Sacramento, Calif. | Litigation | 58,000,000 |
| Seqirus USA Inc. | Summit, N.J. | Trade | 35,414,901 |
| Medical Card System | San Juan | Customer Liabilities | 28,109,859 |
| Prisma Health | Missoula, Mont. | Customer Liabilities | 12,355,499 |
| AmeriScourceBergen Drug Corp |
Chesterbrook, Pa. | Trade | 11,839,180 |
| UFCWNorcal | Roseville, Calif. | Customer Liabilities | 10,264,901 |
| Walgreens Drug Stores | Deerfield, Ill. | Customer Liabilities | 9,502,225 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel |
Edward O. Sassower Joshua A. Sussberg Aparna Yenamandra Ross J. Fiedler Zachary R. Manning |
Kirkland & Ellis |
New York |
| Debtors' Co-Counsel |
Michael D. Sirota Warren A. Usatine Felice R. Yudkin Seth Van Aalten |
Cole Schotz | Hackensack, N.J. |
| Debtors' Invesment Banker |
NA | Guggenheim Partners |
NA |
| Debtors' CRO | Jeffrey S. Stein | Stein Advisors |
New Canaan, Conn. |
| Debtors' Restructuring Advisor |
Marc Liebman | Alvarez & Marsal North America |
NA |
| Co-Counsel to Bank of America as DIP ABL Agent |
John F. Ventola Jonathan D. Marshal Mark D. Silva |
Choate Hall & Stewart |
Boston |
| Co-Counsel to Bank of America as DIP ABL Agent |
Alan J. Brody Oscar N. Pinkas |
Greenberg Traurig |
Florham Park, N.J. |
| Counsel to the Parent Board |
NA | Wilson Sonsini Goodrich & Rosati |
NA |
| Counsel to the Disinterested Directors of Hunter Lane |
NA | Katten Muchin Rosenman |
NA |
| Counsel to the Disinterested Directors of Thrifty Payless, Inc. |
NA | Milbank | NA |
| Counsel to the Disinterested Directors of Rite Aid Corporation |
NA | Kobre & Kim | NA |
| U.S. Trustee | Jeffrey M. Sponder Lauren Bielskie |
Office of the U.S. Trustee |
Newark, N.J. |
| Debtors’ Claims Agent | Benjamin J. Steele | Kroll | New York |
DIP Financing Motion
Bank of America is the DIP agent, with certain prepetition first lien lenders serving as the DIP lenders. The DIP $3.45 billion in commitments are allocated as follows: a $2.85 billion DIP ABL revolver, a $400 million DIP FILO facility and a $200 million DIP term loan facility. The facility matures one year after the closing date.
The proceeds of the DIP loans will be used in accordance with the budget for working capital needs and for general corporate purposes.
The DIP facility is priced as follows:
- The DIP ABL facility has an annual interest rate of SOFR + 3.25% + 0.1% credit spread adjustment, or CSA, with a 0.50% unused line fee, and a 0.85% upfront fee payable at closing;
- The DIP FILO facility has an annual interest rate of SOFR + 5.25% + 0.1% CSA, subject to a reduction of the margin to 4.75% + 0.1% CSA upon the occurrence of certain paydown events, and a 1% upfront fee payable at closing;
- The DIP term loan facility has an annual interest rate of SOFR + 7.50% + 0.1% CSA and a 4% upfront fee payable at closing of the DIP FILO facility.
The DIP financing contains a rollup of prepetition obligations that is structured as follows: (a) upon entry of an interim order, the repayment and refinancing of all prepetition FILO loans with proceeds of the rollup DIP FILO loans and (b) the repayment and refinancing of the prepetition revolving loans as set forth in the DIP ABL credit agreement and the interim order, including the application of all collections on account of DIP ABL priority collateral to the outstanding principal balance of the prepetition revolving loans, thereby creating a dollar-for-dollar increase in “ABL Availability,” as defined in the DIP ABL credit agreement.
On an interim basis, there would be a “creeping” rollup of the prepetition revolving loans, and upon entry of the final order, an extension of the DIP revolving loans to repay and refinance any remaining outstanding prepetition revolving loans.
To secure the DIP ABL liens, the debtors propose to grant liens on all DIP shared collateral. To secure the DIP term loan, the debtors propose to grant liens on all the DIP shared collateral and any DIP term loan exclusive collateral.
DIP shared collateral is defined as the debtors’ interests in assets and properties other than DIP term loan exclusive collateral. The DIP term loan exclusive collateral means the debtors’ interest in the following assets and properties:
(a) All real property and interests therein (including both fee and leasehold interests);
(b) All proceeds of leasehold interests;
(c) All equity interests in the direct or indirect subsidiaries of Rite Aid;
(d) All other assets of the debtors, other than to the extent constituting DIP shared collateral;
(e) All “commercial tort claims;
(f) All insurance policies;
(g) Except to the extent constituting DIP shared collateral, all “Documents”, all “General Intangibles,” all “Instruments” and all “Letter-of-Credit Rights” (as each quoted term is defined in Article 9 of the Uniform Commercial Code);
(h) All collateral and guarantees given by any other person;
(i) All books and records;
(j) All products and proceeds; and
(k) Upon entry of the final order, proceeds of avoidance actions with respect to assets of the type referred to in clauses (a) through (d), provided that DIP term loan exclusive collateral shall not include the debtors’ real property leases (but shall include all proceeds of such leases) to the extent a grant of a security interest would violate or invalidate the lease or create a right of termination in favor of any other party after giving effect to the applicable anti assignment provisions of the UCC and the Bankruptcy Code.
(b) All proceeds of leasehold interests;
(c) All equity interests in the direct or indirect subsidiaries of Rite Aid;
(d) All other assets of the debtors, other than to the extent constituting DIP shared collateral;
(e) All “commercial tort claims;
(f) All insurance policies;
(g) Except to the extent constituting DIP shared collateral, all “Documents”, all “General Intangibles,” all “Instruments” and all “Letter-of-Credit Rights” (as each quoted term is defined in Article 9 of the Uniform Commercial Code);
(h) All collateral and guarantees given by any other person;
(i) All books and records;
(j) All products and proceeds; and
(k) Upon entry of the final order, proceeds of avoidance actions with respect to assets of the type referred to in clauses (a) through (d), provided that DIP term loan exclusive collateral shall not include the debtors’ real property leases (but shall include all proceeds of such leases) to the extent a grant of a security interest would violate or invalidate the lease or create a right of termination in favor of any other party after giving effect to the applicable anti assignment provisions of the UCC and the Bankruptcy Code.
The debtors include the following lien priority chart:
The facility has various fees, including:
- Commitment fee: The borrower agrees to pay to the administrative agent for the account of each revolving lender a commitment fee, at 0.5% per annum on the daily unused amount of the revolving commitment of each applicable class of such lender during the period from and including the closing date to but excluding the date on which the commitment terminates.
- Letter of credit fees: The borrower agrees to pay several fees on account of LCs, including:
- To the administrative agent for the account of each revolving lender a participation fee with respect to its participations in letters of credit, to accrue at the same applicable rate as in effect from time to time for interest on term SOFR revolving loans on the daily amount of such lender’s LC exposure (excluding any portion thereof attributable to unreimbursed LC disbursements) during the period from and including the closing date to but excluding the later of the date on which such lender’s revolving commitment of an applicable class terminates and the date on which such lender ceases to have any LC exposure; and
- To each issuing bank a fronting fee, to accrue at the rate of 0.125% per annum on the daily outstanding amount of such issuing bank’s letters of credit during the period from and including the closing date to but excluding the later of the date of termination of the total revolving commitments and the date on which there ceases to be any LC exposure (or, if earlier, the “Latest Revolving Maturity Date of Revolving Commitments held by such Issuing Bank”), as well as such issuing bank’s customary processing fees.
- Upfront fees: 0.85% of aggregate amount of DIP revolving facility; 1% of aggregate amount of DIP FILO facility; 4% of aggregate amount of DIP term loan facility; all payable upon closing of the DIP facilities following entry of the interim order.
- ABL/FILO arrangement fees: 0.425% of aggregate amount of DIP ABL facilities, payable upon closing of the DIP ABL facilities following entry of the interim order.
- DIP term loan arrangement fee: $2 million, payable upon closing of the DIP term loan facility following entry of the interim order.
The company proposes the following adequate protection to its prepetition lenders: replacement liens (including proceeds of avoidance actions subject to a final order), subject to lien priority, allowed superpriority administrative expense claims and payment of professionals’ fees and expenses.
The DIP facilities also require the DIP borrowers to provide periodic reports to the DIP agents and their respective professionals regarding the budget, consolidated financial statements of the DIP borrowers, key performance reports, and summaries of accounts payable.
In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b].
The post-termination carve-out for professional fees is $20 million.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
- Oct. 16, 2023: Debtors file DIP motion, bidding procedures motion, motion to close specified stores plan;
- Oct. 17: Entry of interim DIP order;
- Oct. 18: Entry of bidding procedures order; entry of store closing order;
- Nov. 20: Entry of final DIP order;
- Dec. 4: Binding bids due with respect to specified Elixir sale;
- Dec. 8: Elixir business auction;
- Dec. 11: Bids due for retail business sale;
- Dec. 14: Entry of specified Elixir sale approval order;
- Dec. 27: Entry of retail business sale approval order;
- Jan 8, 2024: Entry of DS order;
- Feb. 19: Entry of initial confirmation order and completion of specified store closing sales; and
- March 22: Plan effective date.
The lien challenge deadline is 75 days after entry of an interim DIP order, or if a UCC is appointed, 60 days after its appointment. The UCC lien investigation budget is $100,000.
Bidding Procedures Motion
The debtors seek approval of bid procedures for their noncore pharmacy benefit manager business Elixir, primarily owned by debtor Hunter Lane LLC and its debtor and nondebtor subsidiaries, which they say is a “cornerstone of the broader restructuring transactions envisioned through these chapter 11 cases, and will provide crucial recoveries to the estate while the Debtors focus solely on their renewed and rationalized core retail business plan.” The debtors have secured “committed strategic bidder” MedImpact Healthcare Systems Inc. as stalking horse for a cash payment of $575 million plus the assumption of certain liabilities.
The debtors are also seeking authority to sell all or a portion of their remaining assets consisting largely of their core retail pharmacy business.
The Elixir marketing process began in early July, and the retail assets marketing process began prepetition, pursuant to which 12 parties have executed or are negotiating confidentiality agreements.
The bid protections consist of a 3.5% aggregate amount for a breakup fee and expense reimbursement with respect to the Elixir sale transaction, and 3% of the applicable purchase price for a Rite Aid retail sale transaction. Subsequent overbids at auction would need to represent a 2% increase in cash or cash equivalents.
The proposed sale timeline is as follows:
In support of the bid procedures, the debtors submitted the declarations of Elise Frejka of Frejka PLLC, special counsel to the debtors with respect to safeguarding personally identifiable information, Adam Rifkin of Guggenheim who details the retail marketing process, the debtors’ proposed investment banker, and Casey Cohen of Guggenheim who details the Elixir process.
The debtors also filed a motion to conduct store closing sales at 154 stores as shown HERE, and seek authority to conduct store closings at additional stores to be determined. Prepetition, the debtors say that in connection with prepetition store closures, they either transferred prescription assets to nonclosing company stores or sold closing stores’ prescription assets to one or more non-Rite Aid pharmacies on a confidential basis, “with such sale transactions averaging $0.8 million per sale.” Through the motion, the debtors “seek authority to continue Sales and internal transfers of Prescription Assets on a confidential basis consistent with their past practice.”
Lease Rejection Motion
The debtors state that a “key component” of the company’s go-forward business plan is “the continuation and completion of the Debtors’ ongoing effort to rationalize their retail pharmacy store footprint.” During the LTM period ended Sept. 30, the debtors reduced their store footprint by about 210 stores, leaving the debtors with about 2,100 stores as of the petition date. The debtors’ lease rejection motion includes a schedule with 347 lease locations to be rejected upon the petition date. According to cleansing materials discussed below, Rite Aid’s current store portfolio includes approximately 150 pre-allocation EBITDA negative stores and approximately 400 retail EBITDA negative stores. A breakdown of the debtors’ store portfolio is below:
Plan / Disclosure Statement
Classification and Treatment of Claims and Interests
Below is a chart of the plan’s classes, along with their impairment status and voting rights:
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
- Class 1 - Other secured claims: Each holder would receive payment in full in cash, the collateral securing its claim, reinstatement of its claim or such other treatment rendering the claim unimpaired.
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 2 - Other priority claims: Each holder would receive payment in full in cash or such other treatment consistent with section 1129(a)(9) of the Bankruptcy Code.
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 3 - ABL facility claims: To the extent any allowed ABL facility claim remains outstanding on the effective date, each holder would receive payment in full in cash or reinstatement of its claim.
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 4 - FILO term loan facility claims: To the extent any allowed FILO term loan facility claim remains outstanding on the effective date, each holder would receive payment in full in cash or reinstatement of its claim.
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 5 - Senior secured notes claims: If the restructuring transaction is a plan restructuring, then each holder would receive “[(A) 100% of the New Rite Aid Common Stock, subject to dilution on account of the New Rite Aid Common Stock issued pursuant to the Management Incentive Plan and any equity-linked securities issued to Holders of Allowed General Unsecured Claims, plus (B) its Pro Rata share of the Takeback Facility, if applicable].”
- If the restructuring transaction is not a plan restructuring, each holder would receive “[its Pro Rata share of the Distributable Proceeds, if any, pursuant to the Waterfall Recovery].”
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 6 - General unsecured claims: Subject to the DIP term loan claims, the ABL facility claims and the FILO term loan facility claims being satisfied in full and the satisfaction of any adequate protection claims, holders would receive “[[--]% of an equity-linked instrument in New Rite Aid (form and terms to be determined), calculated as of the Effective Date and equal to the product of a formula calculated as the (midpoint value of owned real estate not encumbered prior to the Petition Date, less the costs and expenses to be paid by, or estimated to be paid by, the Debtors’ Estates to administer the Chapter 11 Cases) divided by (the sum of the numerator plus the total amount (including principal and accrued but unpaid interest) of the equitized Senior Secured Notes Claims)]” or “in the event of a Credit Bid - 363 Sale or an Alternative Sale Transaction, [its Pro Rata share of the Distributable Proceeds, if any, pursuant to the Waterfall Recovery].”
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 7 - Intercompany claims: Each intercompany claim would be, at the option of the debtors, reinstated, set off, settled, distributed, contributed, canceled or released without any distribution, or receive such other treatment as is reasonably determined by the debtors.
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 8 - Intercompany interests: Each intercompany interest would be, at the option of the debtors, reinstated, set off, settled, distributed, contributed, canceled or released without any distribution, or receive such other treatment as is reasonably determined by the debtors.
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 9 - Existing equity interests in Rite Aid: All existing equity interests in Rite Aid would be canceled and extinguished, and holders would receive no recovery.
- Projected amount: “$[●].”
- Projected recovery: “[●].”
- Class 10 - Section 510(b) claims: Section 510(b) claims would be discharged, canceled, released and extinguished without any distribution to holders.
- Projected amount: “$[●].”
- Projected recovery: “[●].”
The disclosure statement does not include a valuation analysis, financial projections or liquidation analysis.
Other Plan Provisions
The plan tentatively provides for releases of the debtors, the reorganized debtors, the wind-down debtors, all releasing parties and their current and former directors, managers, officers, investment committee members, special committee members, equityholders, predecessors, participants, successors, assigns, subsidiaries, partners, limited partners, general partners, principals, members, management companies, fund advisors or managers, employees, agents, trustees, advisory board members, financial advisors, attorneys, accountants, investment bankers, consultants, representatives and other advisors.
The plan notes that the proposed releases “remain subject to the outcome of any ongoing diligence efforts of the disinterested directors at the applicable Debtor Entities.”
Creditors and equityholders may opt out of the releases.
Cleansing Materials
The debtors in an 8-K filing publicly disclosed cleansing materials pursuant to confidentiality agreements with certain secured noteholders entered in August and September. The following projections are provided in the materials:
The company states that, in addition to footprint rationalization, it “has developed plans for additional cost rationalization of ~$168MM.”
Additionally, the cleansing materials include the following monthly liquidity projections:
The debtors included the following detail on Rite Aid’s owned real estate:
Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for joint administration
- The cases will be jointly administered under case No. 23-18993.
- Motion to extend time to file schedules and statements of financial affairs
- Motion for case management order
- Motion to set discovery deadlines and protocols for confirmation
- Motion to establish trading procedures
- Rite Aid Corp. seeks to establish trading procedures for its common stock, to be able to object to and prevent transfers if necessary to preserve net operating losses and other tax attributes. The debtors had approximately $1.9 billion of federal NOLs, approximately $105.7 million of carry-forwards and approximately $12.6 million of business tax credits as of Feb. 26, 2022.
- Motion to set record date for claims transfers
- Motion to pay prepetition employee wages and benefits
- The debtors seek authority to pay approximately $327 million in prepetition compensation and benefits claims held by about 45,500 employees.
- Motion to pay prepetition claims of critical vendors
- The debtors seek authority to pay up to $203 million in prepetition vendor claims, including $138 million on an interim basis during the first 30 days of the case.
- Motion to use cash management system
- The company has 165 bank accounts (including four nondebtor accounts), with 21 at Fifth Third Bank, 20 at Bank of America, 13 at M&T Bank, 13 at U.S. Bancorp and 10 at Wells Fargo.
- The debtors estimate that cash collections average approximately $1.9 billion per month, including store cash receipts, credit and debit card receipts, and e-commerce sales. The debtors estimate that total disbursements will continue to average approximately $1.9 billion per month during the case.
- Motion to maintain customer programs
- Motion to maintain insurance programs
- Motion to pay prepetition taxes and fees
- Motion to provide utilities with adequate assurance
- Application to appoint Kroll as claims agent
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.