RAD - Rite Aid Shareholders Are Wiped Out Under A Chapter 11 Bankruptcy Plan

2023-10-16 10:15:47 ET

Summary

• Rite Aid File for Ch.11 bankruptcy on October 15.
• Under the plan shareholders get no recovery and shares will be cancelled.
• There is a stalking horse bid of $575 million for Elixir.
• Secured noteholders get 100% of the new equity.
• McKesson is trying to terminate their supply contract with Rite Aid.

As expected , Rite Aid (RAD) filed for Ch.11 bankruptcy in New Jersey Sunday night. The filing included a reorganization plan ( docket 42 ) and disclosure statement (docket 43) that wipes out RAD shareholders. The RSA term sheet is contained in docket 20 as Exhibit A. Elixir is being sold for $575 million to MedImpact Healthcare Systems unless there is a higher bidder. Senior secured noteholders will get all the new equity, or they might do a credit bid for the assets under a dual track approach. McKesson Corp (MCK) has threatened to terminate supplying Rite Aid with drugs (docket 19). There are approximately $1.9 billion NOLs that being protected, and additional stores will be closed. RAD stock is rated a strong sell.

Recoveries Under Reorganization Plan

RAD Shareholders

Under the plan Rite Aid shareholders are in Class 9 and are not allowed to vote on the plan - they are deemed to have rejected the plan. They get no recovery and shares will be cancelled on the plan effective date:

"All Existing Equity Interests in Rite Aid will be cancelled and extinguished, and Holders of Existing Equity Interests in Rite Aid shall receive no recovery on account of such Interests."

Senior Secured Noteholders

The senior secured noteholders who collectively have $1.170 billion claim are in Class 5 and get 100% of the new equity plus some potential payment of $200 million cash from the sale of Elixir. They also may instead do a credit bid for the assets under a dual approach under the dual track approach they are taking. Either way it seems that the secured noteholders will own the New Retail Rite Aid 2.0 unless there is a higher bidder than their potential credit bid, which is highly unlikely.

Unsecured Noteholders

The unsecured notes are included in the general unsecured claim Class 6 and are entitled to vote. Their recovery is "[--]% of an equity-linked instrument in New Rite Aid (form and terms to be determined)", assuming there is the typical Ch11 reorganization and Rite Aid exits bankruptcy as an operating company. If the secured noteholders credit bid or there is some other section 363 sale, then they get a recovery based on the typical "waterfall", which would most likely mean no cash recovery.

Selling Elixir

MedImpact Healthcare Systems was selected on October 15 as the stalking horse bidder with their $575 million cash bid. If there are other higher bidders, an auction will be held on November 20.

It is interesting to note that there was no sale of Elixir to raise needed cash prior to them filing for bankruptcy. This might be partially because of section 548 issues regarding a potential unwinding of that transaction if Rite Aid "received less than a reasonably equivalent value". Potential buyers don't want exposure to a potential section 548 litigation and would rather buy the asset "free and clear" during a Ch.11 proceeding. I have covered this potential issue in a number of previous articles.

Timetable

The RSA has some milestone dates - including January 14, 2024 for the disclosure statement order and February 19, 2024 for confirmation order. I assume that trading in Rite Aid stock could continue until the stock is cancelled in 1Q 2024 under the current timeline.

Opioid Litigation

There is no specific reference to the opioid litigation. Often when assets are sold under section 363, they are sold "free and clear" of liabilities or when a company exits bankruptcy in newly reorganized company, they are also free and clear of prior liabilities and claims. I would, therefore, expect some objection filings by various governments who filed litigation against Rite Aid. Actual allowed claims from lawsuits are usually just classified as general unsecured claims and may get nothing under Rite Aid's plan.

Closing More Stores

Rite Aid is already in the process of closing 164 stores and are seeking permission to close more (docket 39) and "The Debtors expect to identify Additional Closing Stores in the future".

Current Store Locations

McKesson Terminated Supply Contract

Rite Aid had been negotiating with McKesson, who supplies the retailer with drugs, prior to their bankruptcy filing. McKesson Saturday afternoon terminated the supply agreement asserting that Rite Aid was insolvent. Now Rite has started litigation against McKesson (docket 19). If McKesson does not continue to supply Rite Aid, the retailer is in serious trouble trying to operate their pharmacies.

Conclusion

The Ch.11 filing on late October 15 was expected. I also expected that prior to the filing an RSA would be negotiated to avoid potential litigation during the bankruptcy process. I was, however, expecting some Opioid settlement would be included in a Ch.11 reorganization plan, but at this point there is no specific mention of this litigation in their plan.

RAD shareholders are being wiped out and get no recovery. The shares and other Rite Aid securities will be cancelled on the plan effective date even if there is a liquidating trust established by the plan administrator. I rate RAD stock a strong sell .

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