Rite Aid (NYSE: RAD) has given into reality and filed for Chapter 11. Given what seems to have been happening with the hoddlers and meme stock artists recently this could be the start of a rally in RAD stock. It would be silly, pointless and ultimately doomed, but there are parts of the market which have not been entirely rational in recent times.
The Chapter 11 announcement is here. There’s no specific insistence that the equity is going to be valueless but that is the normal outcome of a Chapter 11 filing. Especially under these sorts of circumstances, where it’s the debt load that is killing the business. The senior secured debt is going to have to take a haircut: “ The Company has reached an agreement in principle with certain of its senior secured noteholders on the terms of a financial restructuring that would significantly reduce the Company’s debt.” and if the senior secured gets hit - let alone the junior and unsecured - then the equity is, with near certainty, going to get wiped out. It’s entirely possible that there will be a meme stock rally but one that persists over time? Nope.
The background here is both just not being a very successful pharmacy chain and also the opioids problems. “The Philadelphia-based company faces more than $3.3 billion in debt and over a thousand federal lawsuits alleging it oversupplied opioids. A number of its stores are stuck in uneconomical long-term leases that the company can’t get out of, making bankruptcy an effective tool to shed them.” This isn’t a situation where the equity is going to get allocated anything. “Filing for bankruptcy stays all pending litigation against the company. “We expect to negotiate a resolution of the opioid-related lawsuits with the various parties involved,” a Rite Aid spokeswoman said. “We also intend to resolve our legacy contract disputes, government investigations and securities matters.”” Any opioid cases become junior and unsecured debt. But those still have to be paid before equity gets anything.
Rite Aid stock price from Google Finance
We looked before at Rite Aid: “Rite Aid (NYSE: RAD) stock dropped 51% on Friday. RAD stock dropped as the WSJ reported that the company was preparing for Chapter 11. Assuming the filing does go ahead it’s not clear that the equity will have any value. It’s not just the current debt load, it’s the potential growth in it as those opioid lawsuits come down the pike at it. The real issue, in law, is whether the prescriptions it filled for the pills were legal prescriptions. If so then it’s got a defence. If not then not so much. But the way that American liability law actually works is that, well, let’s not try standing too much upon trivialities like evidence and facts. “
Given what happened to others hit by opioid lawsuits, like Mallinckrodt, we really shouldn’t be expecting anything for the equity. Heck, in that last case, the equity got wiped out once now it looks like the new equity might get wiped out too.
As we say, it’s entirely possible that there’s going to be some foolishness now the Chapter 11 filing is here. Play in that foolishness by all means - betting is fun. But don;t think - or at least we’re reasonably certain about this - that there’s going to be any final value to the Rite Aid equity.