99 Cents Only, backed by Ares and CPPIB, faces debt woes

99 Cents Only Stores, the discount retailer backed by Ares Management and Canada Pension Plan Investment Board, faces an unsustainable capital structure as competition in its California market from Aldi and Grocery Outlet eats into its business, according to recent research on the company’s debt.

The company has been operating at a debt-to-EBITDA multiple of more than 13x, hindered by its inventory management and cannibalization from new store openings, analysts said. The chain reported a drop of 2.7 percent in same-store sales for fiscal 2016.

“In addition to the company’s self-inflicted executional issues that it continues to work through, it is facing heightened competitive headwinds from increased competition in its core Southern California market,” Declan Gargan, analyst at S&P Global Ratings, said in a research note.

Aldi, the German supermarket chain, plans to launch 45 new stores in Southern California even as value-oriented chain Grocery Outlet rapidly expands, he said. Both “could take market share given 99 Cents Only’s recent challenges,” Gargan said.

On the plus side, 99 Cents Only refinanced its $160 million asset-based loan in April. This will cover its liquidity needs for the coming year, but the company’s capital structure is unsustainable, Gargan said.

On May 24, S&P lowered the corporate-credit rating on 99 Cents Only to CCC+ from B-. The CCC rating means its debt is currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments, according to S&P definitions.

Ares and CPPIB agreed to pay $1.6 billion in cash for 99 Cents Only Stores in 2011. Leonard Green & Partners also took part in bids for the company, according to reports at the time.

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