99 Cents Only Stores downgraded to Caa2 by Moody's on weak operating performance

99 Cents Only Stores LLC was downgraded today by Moody's to Caa2 from Caa1, and its outlook was revised to stable from positive, with the agency citing operating performance that came in "much weaker than expected." Moody's also cut the company's $350 million senior secured notes due 2026 to Caa2 from Caa1.

Moody's now projects that 99 Cents Only will generate negative free cash flow over the next year, with the agency saying that the performance is "weaker than its peers in the value and discount consumables/grocery sector." Moody's said the unexpectedly low profitability drives its estimates that leverage will come in above 8x and EBIT/interest under 1x over the next 12 months.

Moody's noted that its ratings take into account the company's "small scale" and geographic concentration in California and the "intense competitive business environment" in its markets. The agency said it believes liquidity is "adequate but remains strained," given both the negative cash flow and $20 million in cash dividends due on a preferred equity contributed by the company's owners.

In October, S&P Global Ratings affirmed the company's issuer rating at CCC+, and its outlook was revised to negative from stable, with the rating agency citing concerns about reduced customer traffic and the resulting lower revenue and cash flow. At the same time, Ratings affirmed the company's senior secured notes at B-.

99 Cents Only Stores is a store chain operating in California, Texas, Arizona and Nevada. It is controlled by Ares Management and the Canada Pension Plan Investment Board.