DUANE READE SAVED BY $125M INJECTION

The outfit that bills itself as New York City’s pharmacy has found a prescription to avoid bankruptcy.

Private-equity firm Oak Hill Capital Partners yesterday said it injected $125 million into drug-store chain Duane Reade as part of a debt refinancing that pushes back principal payments until 2015 and eliminates debt covenants.

The capital injection effectively means that Oak Hill is doubling down on Duane Reade, bringing to around $400 million what the PE firm has invested in the chain since taking it private in a $750 million, highly leveraged buyout in 2004.

Since that deal, however, the retailer’s profit margins on things like branded prescription drugs have narrowed, crimping the chain’s ability to service its debt.

After the refinancing, Duane Reade is expected to generate about $60 million in cash flow after making interest payments, and owe $430 million.

Oak Hill becomes the latest in a string of PE firms in recent months opting to inject more cash into companies that are considered strong but have had trouble meeting debt obligations.

Investors have been souring on Duane Reade in recent months, as the chain, the largest pharmacy chain in the New York area, faces stiff competition from retailers like CVS and Walgreen, each of which has several store openings planned in coming months. Duane Reade has nearly 250 locations, while CVS has around 110 stores and Walgreen has 50.

Duane Reade has also struggled to service its debt load, which last month totaled more than $558 million as sales have slowed.

Before yesterday’s capital injection, both Moody’s Investors Service and Standard & Poor’s downgraded Duane Reade’s credit rating on worries the company might default on its debt payments.