California-based 99 Cents saw weaker profitability due to declines in inventory shrinkage and inability to offset higher costs. The retailer was also hit by the temporary shut down of its distribution center in Texas due to an ammonia leak, which weighed on its profitability during the first half of 2023, according to Moody’s note last November.

Such earnings pressure have in turn buoyed leverage to unsustainable levels, Moody’s said. 99 Cents is facing a $160m asset-based revolver and $32.5m first-in-last-out term loan, both due in May 2025, as well as $350m senior secured notes maturing in January 2026.

Quotes on the 7.5% notes have been hovering around 33 cents in the past three months.

Its owners are set to receive $20m in annual dividends due to a $200m preferred equity investment, which further pressures the company’s cash flow, the rating agency said.

To increase breathing room, 99 Cents closed a $188m sale-leaseback of a California distribution facility last August, sources said.

As of 28 July, it had roughly $16m of cash on hand and about $30m to $40m of revolver availability in the next 12 months, Moody’s noted. The company could also boost its liquidity by monetizing its 41 stores, the rating agency said.

Representatives at 99 Cents and Ares declined to comment. Jefferies and CPPIB didn’t respond to requests comment.

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