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Rating Action:

Moody's upgrades 99 Cents' CFR to Caa1; PDR upgraded to Caa1-PD appended with LD designation

31 Jul 2019

New York, July 31, 2019 -- Moody's Investors Service ("Moody's") today upgraded 99 Cents Only Stores LLC's (99 Cents) Corporate Family Rating and Probability of Default rating to Caa1 and Caa1-PD from Caa2 and Ca-PD respectively and appended the PDR with the "/LD" (limited default) designation. Moody's will remove the "/LD" designation from the company's PDR after three days. Moody's also upgraded the company's Senior Unsecured Notes to Caa3 from Ca, and affirmed the senior secured term loan rating at Caa2. The outlook is stable.

"The company's recently concluded recapitalization resulted in substantially reducing its debt load making the capital structure more sustainable for the longer term", Moody's Vice President Mickey Chadha stated. "The transaction will also lower the company's cash interest payments by approximately $15 million annually and also resulted in an additional cash infusion of $34 million thereby improving availability under the company's revolving credit facility", Chadha further stated.

Upgrades:

..Issuer: 99 Cents Only Stores LLC

.... Probability of Default Rating, Upgraded to Caa1-PD /LD from Ca-PD

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

....Senior Unsecured Regular Bond/Debenture, Upgraded to Caa3 (LGD6) from Ca (LGD6)

Affirmations:

..Issuer: 99 Cents Only Stores LLC

....Senior Secured Bank Credit Facility, Affirmed Caa2 (LGD4 from LGD3)

Outlook Actions:

..Issuer: 99 Cents Only Stores LLC

....Outlook, Remains Stable

RATINGS RATIONALE

These rating actions result from 99 Cents' completion of its conversion of all of its second lien debt and 92% of its third lien debt to preferred and common equity thereby reducing debt by almost a third. The transaction was characterized as a distressed exchange. With this debt reduction, the company will lower its cash interest payments by approximately $15 million annually. The Company's sponsors, Ares Management and the Canada Pension Plan Investment Board, will retain about 73% ownership and majority control of the Company.

The Caa1 Corporate Family Rating reflects the company's adequate liquidity, weak credit metrics, geographic concentration in California and the intense competitive business environment in its core markets. The rating also reflects the high execution risk related to the company's planned strategic initiatives and cost cuts especially in an intense competitive environment. Pro forma for the recapitalization debt/EBITDA will be about 6.5x for the LTM period ending May 3, 2019 and EBIT/interest will remain below 1.0x. We do expect modest improvement in credit metrics with debt/EBITDA improving to about 6.0x at the end of fiscal period ending February 2021. The company's management team has seen success in implementing a turnaround strategy which includes improved inventory and shrink management, and improved efficiencies including new third party distributor relationships. Management has also started to upgrade the company's store base to enhance the customer experience. The improvement in operations has been evident in the positive same store sales growth for the last eight quarters and improved profitability. Other rating factors include positive growth prospects for the dollar store sector which benefits from affordable, low price points and relative resistance to economic cycles.

The stable outlook reflects our expectation that liquidity will be adequate, operating performance will continue its upward trajectory and that the company will refinance its Term Loan well in advance of its January 2022 maturity.

Ratings could be downgraded if liquidity deteriorates or the company's term loan is not refinanced well in advance of maturity, or EBIT/interest is sustained below 1.0 times or if operating performance deteriorates such that debt/EBITDA deteriorates to above 7.25x. Change in the company's financial policies could also result in a downgrade.

Ratings could be upgraded should 99 Cents Only's earnings grow such that debt to EBITDA approaches 5.5x, free cash flow is positive and term loan maturity is addressed. 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. As of May 3, 2019, the Company operated 387 retail stores in California, Texas, Arizona, and Nevada. Revenues are about $2.3 billion.

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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

Janice Hofferber, CFA
MD - Corporate Finance
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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