- Deep discount retailer 99 Cents Only Stores recently completed an arrangement with creditors, eliminating many of their debt obligations.
- Debt to equity swaps are a common method companies use to improve liquidity.
- Under the newly agreed upon terms, 99 Cents Only Stores will issue common and preferred stock for its outstanding debt.
This week, Durig Capital provides a brief update on 99 Cents Only Stores LLC, a deep discount retailer whose bonds we have reviewed in the past for our Fixed Income 2 (FX2) High Yield Managed Income Portfolio. 99 Cents Only Stores has recently been challenged by its outstanding debt obligations. Here are some of the highlights:
Deep discount retailer 99 Cents Only Stores recently completed an arrangement with creditors which would eliminate many of their short term debt obligations.
Debt to equity swaps are a common method companies use to improve liquidity.
Under the newly agreed upon terms, 99 Cents Only Stores will issue common and preferred stock for some of its outstanding debt.
Recent Financial Statements
Bridging the Cash Gap
The Debt to Equity Swap
In the agreement with its creditors, 99 Cents Only Stores appears to have resolved many near term debt issues and liquidity problems through a combination of rolling over some of their outstanding debt, a recent rights offering, and a bridge loan.
Under the terms of the debt to equity swap creditors agreed on, 99 Cents Only Stores will issue (Class A, B) and preferred stock for some of its outstanding $146 M second-lien term loan facility and $143 M of their 2022 secured bonds.
Improved Cash Flow + Liquidity
Receiving $34 M from their recent rights offering, the $10 M bridge loan and eliminating much of their debt obligations in a recent debt to equity swap has allowed 99 Cents Only Stores to not only reduce their annual cash / interest burden by $15 M, but should also improve their liquidity position and overall cash flow, and should result in improvements of their balance sheet.
No Longer in the 30-Day Grace Period
99 Cents Only Stores exercised its 30-day grace period to make the delayed payment of interest on its 11% Senior Notes due December of 2019. It is the belief of some that the grace period was used to allow the company more time to reach an agreement with its creditors, with the bridge loan potentially aiding in the delayed payment of interest on their 2019 notes.
Although Standard & Poor’s recently lowered the company’s credit rating from CCC+ to CC, it is very common for this to occur in the midst of a restructuring as credit rating agencies view any form of divergence from the credit agreement / prospectus as a technical default, even in the event of a restructuring where the company’s balance sheet is greatly improved as a result.
An Improved Outlook
In 99 Cents Only Stores’ recent earnings call, the company reported continued growth in the company’s ongoing operations and a significant deleveraging arrangement which should help to reduce some of the company’s outstanding debt obligations and position them for continued execution of their strategic initiatives.
Another potential positive for 99 Cents Only Stores is that it operates within a growing sector, and has a similar business model to The Dollar General, another extreme discount retailer whose business has not appeared to have been hurt by Amazon’s online presence, nor Walmart’s massive space in the retail sector. Whether this trend continues is anyone’s guess, but at present it appears these types of deep discount retailers are still in strong demand.
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Summary & Conclusion
Now, 99 Cents Only Stores appears to be in a very exciting position. The company’s recent influx of new cash and the completion of a significant reduction of some of its outstanding debt appear to have all come together and should result in higher cash generation and increased cash flow, an improved liquidity position, and clean up their balance sheet. 99 Cents Only Stores now looks to be positioned for solid execution of their ongoing business and continued growth.
Issuer: 99 Cents Only Stores
Disclosure: Durig Capital and certain clients may hold positions in 99 Cents Only Stores’ December 2019 bonds.
Disclaimer: Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. The high yield strategies presented in this review by Durig Capital may not be suitable for all investors. This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.