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Rite Aid lands $1B loan
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April 11, 2000: 2:14 p.m. ET
Citibank leads underwriters; move seen solving chain's short-term debt troubles
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NEW YORK (CNNfn) - Troubled drugstore chain Rite Aid Corp. obtained a $1 billion line of credit Tuesday from a Citibank-led financial coalition that officials said should eliminate the company's debt problems for at least two years.
The Camp Hill, Pa.-based company said the new credit facility, also being underwritten by Fleet Retail Finance Inc. and Heller Financial Inc., will provide the company with more than $600 million in additional liquidity for general working purposes and pay off Rite Aid's existing $300 million asset securitization facility.
Company officials said that, if approved, the new credit will ensure Rite Aid (RAD: Research, Estimates), the nation's No. 3 drugstore chain, will have almost no debt maturing prior to August 2002.
"The new financing commitment and debt modifications that we are announcing today are a cornerstone of our turnaround plan," said Bob Miller, who was appointed Rite Aid's chairman and CEO last December.
Jody Cook, a Rite Aid spokeswoman, said the new credit package means the company no longer is actively seeking a buyer for its pharmacy benefits manager, PCS Health Systems. The company, which paid $1.5 billion for PCS in November 1998, had been trying to sell the unit to raise enough capital to help pay off debt.
PCS Health Systems, the nation's second-largest pharmacy benefits manager based in Scottsdale, Ariz., administers benefits to more than 50 million people and processes more than 300 million prescriptions a year.
"We are not now currently talking to anybody about it," Cook said. "But we think it's a great asset, and we would not close the door on a great offer."
Lead banks support plan
The financing is subject to Rite Aid obtaining consent from the holders of $3.3 billion in existing debt to postpone all outstanding debt payments until Aug. 15, 2002. The company said it has received a strong indication of support from the primary holders of that debt, including Citibank (C: Research, Estimates), Bank of America Corp. (BAC: Research, Estimates), Chase Manhattan (CMB: Research, Estimates), J.P. Morgan (JPM: Research, Estimates) and Bank One Corp. (ONE: Research, Estimates).
"Our lead banks support the plan and we believe the plan is in the best interest of our other lenders, so we expect to get all the approvals we need," said Karen Rugen, a Rite Aid spokeswoman.
 As part of Tuesday's agreement, which the company hopes to close next month, J.P. Morgan, already has agreed to convert $200 million of the $268 million in existing Rite Aid debt it holds into common stock at a price of $5.50 per share.
Miller said the new credit facility essentially gives Rite Aid a little more than two years to return some financial credibility to the company's balance sheet and reinvigorate its stock price, which has languished for nearly a year now.
The company secured the new credit facility with its shares of PCS Health Systems and Drugstore.com, Miller said.
In February, Rite Aid's chief competitor, CVS Corp. (CVS: Research, Estimates), the nation's No. 1 drugstore operator, said it would not buy PCS, ending weeks of speculation that the two companies were near a deal.
"We've looked at a number of alternatives and believe as a management team that this one balances all of our needs," Miller said during a conference call with analysts Tuesday. "Management and the board believe that Rite Aid has core strengths that can be improved with this additional liquidity. I believe its in the best interests of our customers, investors, bond holders and banks."
But at least one analyst dismissed the strategy, saying the company is just piling more debt into an already deep hole.
"Shareholders basically have got more debt, more fees, more equities," said Mark Husson, a Merrill Lynch analyst.
Husson said he maintained his "avoid" rating of Rita Aid, which has been in place since the company first warned of financial troubles in the fourth quarter of 1998.
Rite Aid hopes the credit line will help stem a tide of recent bad news. Last year, the company launched an internal review of its accounting procedures, after officials uncovered irregularities that will force Rite Aid to lower its net income for the last three years by $500 million. That revelation also sparked an ongoing probe by the U.S. Securities and Exchange Commission.
Rite Aid has since been stung by speculation of a criminal investigation into its accounting procedures, and by rumors that its stock would be dropped from the New York Stock Exchange.
Rite Aid shares gained 1-9/16 to 7-1/4 in afternoon trading on the Big Board Tuesday. 
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Rite Aid Corp.
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