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Related Issuers
Rating Action:

Moody's downgrades 99 cents' CFR to Caa2

14 Dec 2021

New York, December 14, 2021 -- Moody's Investors Service ("Moody's") today downgraded 99 Cents Only Stores LLC's (99 Cents) corporate family rating to Caa2 from Caa1 and probability of default rating to Caa2-PD from Caa1-PD. Moody's also downgraded the rating of the company's senior secured notes from Caa1 to Caa2. The outlook has been changed to stable from positive.

"The downgrade reflects the company's much weaker than expected operating performance which has constrained liquidity as we expect free cash flow to remain negative", Moody's Vice President Mickey Chadha said. "The company has underperformed its peers during the pandemic as it did not get any boost in sales or earnings like many of its peers in the food retailing business did", Chadha further stated.

Downgrades:

..Issuer: 99 Cents Only Stores LLC

.... Corporate Family Rating, Downgraded to Caa2 from Caa1

.... Probability of Default Rating, Downgraded to Caa2-PD from Caa1-PD

....Senior Secured Regular Bond/Debenture, Downgraded to Caa2 (LGD4) from Caa1 (LGD4)

Outlook Actions:

..Issuer: 99 Cents Only Stores LLC

....Outlook, Changed To Stable From Positive

RATINGS RATIONALE

99 Cents' Caa2 corporate family rating reflects its weak cash flow generation with Moody's expectation that free cash flow will be negative for the next 12 months. The rating also reflects the company's small scale, geographic concentration in California and the intense competitive business environment in its core markets. The company's operating performance has been weaker than its peers in the value and discount consumables/grocery sector especially in light of the increased demand for food at home during the coronavirus pandemic. As a result, profitability has been much lower than expected and credit metrics have deteriorated with Moody's adjusted debt/EBITDA expected to be above 8.0x and EBIT/interest expected to remain below 1.0x in the next 12 months. Liquidity is adequate but remains strained as free cash flow will remain negative and the $20 million annual cash dividends on the $200 million in preferred equity contribution by existing owners in 2020 will also be a drain on cash flow. The company does own 61 stores and two distribution centers which could potentially be monetized to generate cash if needed. The rating also reflects the execution risk related to the company's planned strategic initiatives and cost cuts especially in an intense competitive environment. Other rating factors include positive growth prospects for the discount and value retail sector which benefits from affordable, low price points and relative resistance to economic cycles. However, the industry remains highly competitive with stronger competitors trying to gain market share.

The stable outlook reflects the lack of near term debt maturities and adequate liquidity provided by the availability under its $160 million revolving credit facility.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be downgraded if liquidity deteriorates, or credit metrics do not show improvement from current levels or if free cash flow generation does not stabilize.

Ratings could be upgraded should earnings grow such that debt/EBITDA is sustained below 6.0x, EBIT/interest is sustained above 1.0x and free cash flow is positive. A ratings upgrade would also require adequate liquidity and financial policies which would support leverage remaining at its improved levels.

99 Cents Only Stores LLC is controlled by affiliates of Ares Management and Canada Pension Plan Investment Board. The Company operates 381 retail stores in California, Texas, Arizona, and Nevada. Revenues are about $2.2 billion.

The principal methodology used in these ratings was Retail published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296095. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Manoj Chadha
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Margaret Taylor
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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​
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