Rite Aid gains after Walgreens opts for assets; energy ticks higher as oil rises; Valeant lower

By Colin Hanner

Chicago, June 29 – Activity swirled around Rite Aid Corp. bonds on Thursday in the distressed debt and high-yield markets, a market source said, with activity trading “like it was a new issue.”

“It was the toast of the town,” the market source said.

Speculation around the Federal Trade Commission’s decision on a proposed merger between Rite Aid and Walgreens Boots Alliance Inc. was not needed on Thursday, as Walgreens and Rite Aid broke off talks of the merger. Walgreens instead decided to buy half of Rite Aid’s stores for more than $5 billion, pending regulatory hurdles.

As bonds drove higher, Rite Aid’s stock plummeted.

In the energy sphere, oil continued its rebound on the week with another session of gains, as California Resources Corp. saw a slight uptick at day’s end compared to intraday levels.

“It was higher, but as oil went down, so did [California Resources],” a market source said.

Valeant Pharmaceuticals International, Inc., which had seen three-consecutive days of fractional gains, was lower on the session, and with limited volume at the tail-end of the week, Neiman Marcus Group, Inc. and Hertz Global Holdings Inc., among others, saw limited activity.

Rite Aid higher on makeover deal

In the past week, speculation from blogs and trade publications have fueled whether the FTC would pass the proposed merger between Walgreens and Rite Aid given concerns of the companies creating a monopoly on the decisions of the pharmaceutical drug industry.

On Thursday, the two companies terminated the takeover agreement, and Rite Aid entered into an asset purchase agreement with Walgreens, which will acquire 2,186 Rite Aid stores and related assets for $5.175 billion. The deal is expected to close in the next six months, pending FTC approval, and proceeds of the deal are expected to pay Rite Aid’s existing indebtedness.

The deal includes a $325 million termination fee for Rite Aid if the deal falls apart.

On the session, Rite Aid’s 6¾% notes due 2021 were up 3 points to 103.

And its 6 1/8% notes due 2023 were up 3 points to 99½.

Rite Aid’s stock was down $1.04, or 26.46%, to $2.89.

“While we believe that pursuing the merger with [Walgreens] was the right thing to do for our investors and customers, this new agreement provides a clear path forward,” said chairman and chief executive officer John Standley in a news release. “The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward.”

The risk appetite through the entire Rite Aid-Walgreens unfolding was wide, with bonds rising or falling within a three-point range depending on speculation day-in, day-out, a market source said.

From a bondholder’s perspective, the new deal mirrors some similarities as if the deal were to be approved by the FTC, which “is why the bonds traded the way they did” on the session, a market source said.

Energy higher with oil

Since a downfall in oil prices this time last week, oil has steadily risen and lifted distressed exploration and production names in the process.

On Tuesday, West Texas Intermediate crude was up 9 cents, or 0.20%, to $44.83, though had been as high as $45.42 during the morning session.

California Resources Corp.’s 8% notes due 2022 were up ½ point to a 63¼ bid, 64¼ offered, though had been as high as 65, market sources said.

EP Energy Corp.’s 9 3/8% notes due 2020 were up 1¼ points to 77¾, and Pacific Drilling Co. mirrored those gains in its 5 3/8% notes due 2020, which finished at 86¾.

Plano, Texas-based Denbury Resources Inc.’s 6 3/8% notes due 2021 were up 1 point to 60, a market source said.

And Candian oil sands producer MEG Energy Corp.’s 7% notes due 2024 were up ¼ point to 77½.

Valeant lower

Valeant Pharmaceuticals, which has seen incremental gains in the bond market since speculation of a debt-equity swap caused a general uptick, were lower on Thursday.

Its 6 1/8% notes due 2025 were down ¼ point to 84¾ on “very heavy trading,” a market source said.

And its 5 7/8% notes due 2023 were down 1/8 point to 87¾.

One-off wrap

With days narrowing to an expected standstill of a summer lull in the distressed market, routine issues traded with limited action, a market source said.

Pet-goods retailer PetSmart Inc.’s 8 7/8% notes due 2024 were quoted at 91¾ bid, 92½ offered, while its 5 7/8% notes due 2024 were quoted at 96 bid, 96½ offered.

Neiman Marcus’ 8% notes due 2021 were down ¼ point to 54½, while its 8¾% notes due 2021 were down 1 point to 48¼.

Grocery store chain Fresh Market Inc.’s 9¾% notes due 2023 were down ½ point to 84½.

And rental-car company Hertz’s 5% notes due 2024 were up 1 point to 82.

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