Oak Hill to pump $125m into Duane Reade

Duane Reade has struggled under its $556.5m debt load and heavy competition from national chains. Oak Hill bought the drug store chain chain in 2004 for $750m.

Oak Hill Capital Partners will inject $125 million into its struggling portfolio company Duane Reade to help it repurchase debt.

The retail chain has struggled under its $556.5 million debt load and this week Standard & Poor’s and Moody’s Investors Service downgraded the company further into junk.

Oak Hill’s investment is meant to partially fund the discounted repurchase of Duane Reade’s $195 million, 9.75 percent senior subordinated notes.

“We view this offer as being tantamount to default given Duane Reade’s highly leveraged, possibly unsustainable, capital structure and weak financial profile,” S&P said in a report. The corporate credit rating may rise, however, depending on the outcome of the transaction, S&P said.

Duane Reade, acquired by Oak Hill in 2004 for $750 million, has been challenged by competition from national pharmacy chains and the threat of economic downturn. Although net loss for the first quarter of 2009 was down from 2008, operating losses totaled $4.4 million compared to $4.1 million during last year’s period. Further, the company’s total debt of $556.5 million is up $9.8 million from 2008.

Oak Hill declined to comment. The firm manages more than $8 billion in private equity capital.