By Paul Gunther
Rite Aid Corporation (Rite Aid) and 119 debtor affiliates commenced their Chapter 11 cases late Sunday evening (15 October) with a prearranged plan of reorganization and disclosure statement. The plan provides for a dual-track reorganization / sale process. At baseline, the plan proposes that holders of senior secured notes would receive 100% of the equity in the streamlined, reorganized debtors. However, this is to be market-tested by separate sale processes for the debtors’ retail sales and pharmacy benefit manager business segments. Depending on the type of reorganization, holders of general unsecured claims will receive either pro rata distributions of equity-linked instruments in the reorganized company or participate in a sale proceeds distribution waterfall. Equity interests will be cancelled and receive no distribution.
Rite Aid is a pharmacy that operates under two segments, a retail pharmacy segment and a pharmacy services segment. The retail pharmacy segment operates more than 2,100 pharmacies in 17 states. In addition to dispensing medications, the retail locations perform immunizations and offer other clinical care. The retail locations also sell health and beauty aids, personal care products and food and consumer products. The company purchases 98% of its prescription drugs from McKesson.
The pharmacy services segment manages pharmacy benefits for over one million members through Elixir, a pharmacy benefit manager (PBM). The PBM offers services including designing and administering health plans and managing drug utilization and insurance claims. It also offers drug benefits under the Medicare Part D program, which is administered by non-debtor Elixir Insurance Company.
The company has approximately 45,000 employees, 14,000 of which are unionized under 18 collective bargaining agreements.
Pre-petition capital structure
As of the petition date, Rite Aid had approximately USD 4bn in funded debt. Pursuant to a credit agreement for which Bank of America serves as administrative agent, the debtors had an ABL facility with a principal amount outstanding of USD 2.223bn. The company also had a first-in, last-out term (FILO) loan facility with USD 400m in borrowings outstanding. Rite Aid has also issued two sets of senior secured notes – secured notes due 2025 of which USD 320m remains outstanding and secured notes due 2026 of which USD 850m is outstanding. These notes are secured by liens on substantially all of the assets of Rite Aid and certain guarantor subsidiaries, with the exception of all real property, all equity interests in the company’s direct or indirect subsidiaries, and certain other exclusions. Finally, the company has issued two sets of unsecured notes – unsecured notes due 2027 of which USD 186m is outstanding and unsecured notes due 2028 of which USD 2m is outstanding.
The company’s prepetition capital structure is summarized in the chart below:
Run-up to chapter 11 filing and operations in bankruptcy
Rite Aid attributes its bankruptcy filing to (i) its heavy funded debt load, (ii) operational “headwinds” such as inflationary pressures, elevated labor costs and declining third-party reimbursement rates, (iii) a retail footprint with unprofitable stores and “dead rent costs,” (iv) liquidity pressures, (v) the costs of litigating over 1,600 opioid-related lawsuits as well as securities lawsuits and government investigations, and (vi) fierce competition from other pharmacies, both brick-and-mortar and online.
As noted above, the debtors filed their bankruptcy petitions on 15 October. Prior to the bankruptcy filing, the company entered into a restructuring support agreement (RSA) with an ad hoc secured noteholder group comprised of at least two-thirds of senior secured noteholders. As described below, the RSA sets forth the treatment of claims in the event of a plan restructuring and sales transactions and the proposed timeline for both processes.
To finance the bankruptcy cases the debtors have agreed to enter into a USD 3.45bn debtor-in-possession (DIP) financing facility provided by a subset of the debtors’ ABL lenders consisting of (i) a USD 2.85bn revolving facility, (ii) a USD 400m DIP FILO facility, and (iii) a USD 200m DIP term loan facility. Outstanding obligations under the ABL and FILO facilities are to be rolled-up into the DIP loans. Bank of America is agent on the loans. The DIP facilities have been approved on an interim basis.
The plan restructuring, or “Rite Aid 2.0,” is premised on both a financial and operational restructuring, including a reduction (currently estimated at approximately 400 stores) in the debtors’ footprint. The debtors propose to restructure through either a (i) plan restructuring that provides for the equitization of the senior secured noteholders’ debt or (ii) one or more sale transactions to the senior secured noteholders or third parties.
If the debtors proceed with the plan restructuring, then senior secured noteholders will receive 100% of the equity in the reorganized company in exchange for the cancellation of the senior secured notes. On the effective date, new Rite Aid will issue new Rite Aid common stock and a new Rite Aid board will be appointed. The reorganized debtors would be funded with an exit ABL facility, an exit FILO term loan facility and, possibly, a takeback facility issued to holders of senior secured notes. The debtors project that upon completion of the restructuring the reorganized company will have a 25% increase to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by fiscal year 2025.
The debtors intend to market test the plan restructuring by running a simultaneous sales process for the debtors’ assets. According to the disclosure statement, the sale could take the form of a credit bid – 363 sale transaction and an alternative sale transaction (or transactions). In a credit bid – 363 sale transaction, holders of senior secured notes would credit bid their claims for a material portion, or substantially all, of the debtors’ assets, subject to any other prior sale transactions completed pursuant to the debtors’ proposed bidding procedures (described below). In an alternative sale transaction, the debtors would sell all, or substantially all, of their retail assets (that is, the assets other than the debtors’ Elixir PBM business) to a third-party or parties.
In connection with their first-day filings, the debtors filed a bidding procedures motion to approve separate sales processes for their Elixir PBM business and retail pharmacy business. According to the disclosure statement, on 15 October the debtors executed a stalking horse agreement with MedImpact that provides for the latter’s purchase of the Elixir business subject to a Bankruptcy Code section 363 auction process. In addition, pursuant to the bidding procedures motion the debtors seek to market their core retail pharmacy business through one or more sale transactions. The debtors’ milestones are 14 December for the entry of a Bankruptcy Court order approving the Elixir sale and 27 December for the Court to approve a sale of the retail operations.
In the event of either type of sale transaction, the debtors will continue in existence as wind-down debtors to resolve claims, prosecute and settle actions and make distributions to claimants. An administrative/priority claims reserve and a wind-down reserve will be funded on or before the effective date. A plan administrator would be appointed to oversee the wind-down of the debtors. The plan administrator would be authorized to transfer the remaining estate assets to a liquidating trust.
Under the plan, holders of DIP ABL claims will receive (i) in the event of a plan restructuring, their pro rata shares of the exit ABL facility, or (ii) in the event of a credit bid – 363 sale transaction or an alternative sale transaction, either payment in full in cash or their pro rata shares of the exit ABL facility. Similarly, holders of DIP FILO claims will receive (i) in the event of a plan restructuring, their pro rata shares of the exit FILO term loan facility, or (ii) in the event of a credit bid – 363 sale transaction or an alternative sale transaction, either payment in full in cash or their pro rata shares of the exit FILO term loan facility. Holders of DIP term loan claims will be paid in full in cash on the effective date.
Holders of Class 3 – ABL Facility Claims and Class 4 – FILO Term Loan Facility Claims will, to the extent that any claims remain outstanding on the effective date, receive payment in full in cash or reinstatement under the respective ABL or FILO exit facility. Classes 3 and 4 are unimpaired under the plan.
Holders of Class 5 – Senior Secured Notes Claims will receive differing treatment depending on whether the restructuring is a plan restructuring. In the event of a plan restructuring, Class 5 claim holders will receive (i) 100% of the new Rite Aid common stock, subject to dilution on account of a management incentive plan (MIP) and any equity-linked securities issued to holders of general unsecured claims, and (ii) their pro rata shares of takeback debt (if applicable). If the restructuring is not a plan transaction, the Class 5 claim holders will receive their pro rata shares of distributable proceeds, if any, pursuant to the plan Waterfall Recovery.
Holders of Class 6 – General Unsecured Claims will also receive different treatment based on the type of restructuring. The plan provides, as a baseline, for holders of Class 6 claims to receive a to-be-determined percentage of equity-linked securities in new Rite Aid, subject to (i) DIP claims, ABL facility claims and FILO term loan claims being paid in full and (ii) the payment of all allowed adequate protection claims. However, in the event of a credit bid – 363 sale or alternative sale transaction, general unsecured claim holders would receive their pro rata share of distributable proceeds pursuant to the Waterfall Recovery.
Both Classes 5 and 6 are impaired under the plan and entitled to vote. The disclosure statement does not provide projected recoveries for those classes.
Existing equity interests in Rite Aid (Class 9) will be cancelled and receive no recovery.
The treatment of claims under the plan is summarized below:
Other plan features and key dates
The plan provides for various exculpations and releases, including third-party releases of the ABL lenders, FILO lenders, DIP lenders, senior secured noteholders and any purchaser(s):
The RSA term sheet contains the following case milestone dates: