New Duane Reade Stock Issue Just the Prescription for Debt Woes: Moody’s

The firm is on review for upgrade after announcing plans to pay back debt.
Ed ZwirnMay 2, 2001

Duane Reade’s plan to issue common stock to pay back debt may improve the company’s credit worthiness, according to a report issued this morning by Moody’s Investors Service.

The retail pharmaceutical company on Monday announced a planned primary offering of four million shares of common stock and a secondary offering of about three million shares.

With Duane Reade stock quoted at $32.80 this morning, the company stands to receive more than $130 million from the sale, which should follow its issuance of a prospectus on May 14.

“The net proceeds to the Company from the primary shares will be used primarily to reduce outstanding debt,” the Duane Reade announcement stated. “The Company will not receive any of the net proceeds from the sale of the secondary shares.”

This morning’s Moody’s announcement put the firm on “review for upgrade,” taking the position that “leverage will significantly improve going forward” as a result of the payback.

Duane Reade, which has nearly $400 million of credit facility and senior subordinated note debt outstanding, has leveraged itself considerably as it grew to a chain of about 180 drug stores, primarily in Manhattan and the other boroughs of New York City.

Moody’s currently rates the firm’s $312.7 million credit facility B1, while giving a B3 to its $80 million of 9.25 percent senior subordinated notes due 2008.

Despite the positive appraisal, the Moody’s announcement also cites risks for the firm going forward.

These include Duane Reade’s plan to expand beyond its Manhattan core market and lower industrywide margins, primarily as a result of low margin third-party-payer prescription medication sales.

“Completion of the anticipated equity offering with concurrent debt reduction will allow the company to maintain financial flexibility as it continues growing rapidly,” the report said.

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