💥New Chapter 11 Bankruptcy Filing - Number Holdings Inc. (a/k/a 99 Cents Only Stores)💥
Retailer sent to wind down after failing to secure financing or a buyer.
Though 99 Cents Only (the “company”) filed for chapter 11 bankruptcy in the red hot District of Delaware (Judge Stickles) on April 7, 2024,* the thing has seemingly been in the zone of stress and/or distress for, like, 99 years. Those of you who have been around the block long enough know what we’re talking about: Ares Management (“Ares”) and the Canada Pension Plan Investment Board (“CPPIB”) took this thing private in early ‘12** and it has been on RX industry “watch lists” since at least, like, ‘17, when the company embarked on the first of what would become a string of restructuring initiatives. Let’s dig in.
The company currently operates 370 “extreme value” retail stores across four states. With a major presence in California, it sells a wide variety of products from everyday household items to grocery items to seasonal and party merchandise, a lot of which the company historically priced at or below … ⚡️wait for it⚡️… 99 cents.
Now may be a good time to note that at the time of the ‘12 take-private transaction — which got done at an aggregate purchase price of $1.6b — the company had only 289 stores. The PE bros used that old PE bro playbook: lever a target into oblivion and expand at a rapid clip. Off to the races! We can only imagine what kind of management fees they took around the track.
Fast forward to late ‘17 and everyone involved with the company has an ‘oh f*ck’ moment. The company’s performance had really begun to hit the skids and the sponsors and lenders — yes the very same sponsors and lenders who thought it was a brilliant idea to load a metric f*ck ton of debt onto a crappy retailer with piss poor margins — realized that they may have to make some sacrifices for the thing to live to see another day. At this point, all kinds of balance sheet tomfoolery ensues and transactions get cut.
First, in December ‘17, the retailer consummated an exchange offer and consent solicitation with holders of $242.2mm of 11% senior notes due ‘19 that swapped in $140mm of newly-issued third lien 13% cash/PIK secured notes due in ‘22. The $242.2mm included notes swapped out by the company’s sponsors in exchange for Series A-1 participating preferred equity with a PIK dividend. Similarly, in ‘17 the sponsors also helped the company extend the maturity of its term loan by agreeing to subordinate their term loan holdings (~$130mm) into a new PIK second lien term loan. “These transactions reduced the Company’s cash interest expense and extended its debt maturity runway” but it didn’t provide the company with actual new money and, ultimately, the company required a more fulsome restructuring.
Which it got in mid ‘19. It was then that the company entered into a transaction support agreement*** with the Patagonia vest-wearers that exchanged their relatively new PIK second lien TL and third lien 13% cash/PIK secured notes due ‘22 for a mix of reorganized common and pref. The transaction eliminated approximately $300mm of net secured debt and reduced the company’s interest burden by approximately $15mm. And there was a rights offering to boot. Through the rights offering, the company generated somewhere around $34mm of fresh capital. You can buy a lot of cheap paper plates with that kind of dough!
We all know what came next. The pandemic didn’t do the company — again, heavily indexed to California — any favors. Once again, the company had to work with its sponsors and lenders. Per the company’s Chief Restructuring Officer (“CRO”):
Faced with these difficulties, the Company refinanced its debt and sought to raise new capital to shore up its balance sheet, and was successful in securing an injection of $200 million in new equity capital from third-party investors and the Company’s equity sponsors, allowing it to further reduce its debt load and improve liquidity.
Herein lies the origin of the company’s $350mm 7.5% senior secured notes due ‘26. The proceeds, together with the new equity investment (in exchange for more prefs) were used to take out the company’s then-outstanding first lien loan facility, redeem in full the company’s third lien 13% cash/PIK secured notes due in ‘22, and pay down outstanding borrowings under its first lien ABL. For those keeping track, this was restructuring #3 and it more or less set the stage for what the capital structure looks like today.
Surely everything was now on the right track, right? LOL, by Q3’21, this sucker was teetering once again. Moody’s downgraded the company to Caa2, citing “much weaker than expected operating performance….” Per RetailDive, “Despite [low credit metrics], [the company’s] owners continue[d] to pull cash out of the company. According to Moody’s, the retailer paid $20 million in annual cash dividends to its owners based on a preferred equity contribution.”
So, this company LBO’d, then expanded its footprint by 100 stores in an increasingly competitive and complex retail atmosphere, then had to undergo a series of balance sheet restructuring transactions — all while paying management fees and dividends to the sponsors — and the company would have you believe that it was primarily a whole bunch of macro factors that led to this bankruptcy filing. Indeed, the PE bros are pointing fingers all over the place — at the pandemic, at record-high inflation, at increased operating costs, at the libs for allowing theft and crime in places like California, and at the libs again for increasing the minimum wage in places like California, basically everyone other than whomever (cough: them) put all that leverage on the company in the first place. We don’t mean to be flip here: surely all of those factors contributed to the company’s current state but let’s not act like things were healthy before the pandemic occurred. That point should be abundantly clear at this point.
So what do the PE dudes do? They decide to hire (or get forced to hire) performance improvement professionals to get things back on track and develop a go-forward strategy that may actually work for the business. These geniuses come up with tried and true strategies like “let’s brighten up the four walls” and “let’s put green in our logo” but, of course, despite the excessive fees paid to said advisors, none of that nonsense worked either. The forces of too much debt, too much inflation and too much theft were too much to contain. The company attempted to pass on costs to their consumers but … uh … they had to contend with their stupid-a$$ name, lol, and a consumer with zero tolerance for price increases. Per the CRO:
The Company had no choice but to pass on to its customers some of the resulting costs, in the form of higher prices, which was met by significant customer resistance and reduced customer traffic. This resistance was exacerbated as the percentage of merchandise priced at 99.99 cents or less decreased from nearly 65% in 2020 to below 50% in 2023.
LOL. They should have changed the name to “Maybe 99 Cents Only?🤷♀️”
At this point the company literally transitioned out of Alvarez & Marsal’s Consumer and Retail Group and turned to its North American Corporate Restructuring group. Roughly around the same time (and shortly after the company levered up a bunch of its real property), the company hired Jefferies Group LLC (“Jefferies”) to advise on potential transactions to address the balance sheet. That mandate expanded mere months later to additional strategic alternatives including a potential sale. As Jefferies did its thing, the company’s situation continued to worsen. It was a perfect storm of sh*te news:
📍None of the prospective buyers that Jefferies reached out to seemed all-too-interested;
📍None of the prospective lenders that Jefferies reached out to — including the holders of the 26s — seemed all-too-interested in sinking (more) money into this cesspool;
📍Vendors tightened trade terms and shifted to cash on demand; and
📍Landlords started sending “pay or quit” default notices.
Sh*t got real. Per the CRO:
By mid-March, the Company’s liquidity became so constrained that the Company had no choice but to intensify its contingency planning efforts, as the prospects for effectuating a going concern solution (whether through a restructuring or a strategic transaction) appeared increasingly dim.
Enter Hilco Merchant Resources LLC to kickstart store closing sales. The company announced on April 4, 2024, that it was shutting all of its stores and intended to commence an orderly wind down to maximize value for its stakeholders. Contemporaneously, the company engaged two parties with respect to DIP financing, ultimately choosing an entity affiliated with Sixth Street Specialty Lending Inc. as the DIP lender. The headline DIP figure is $60.8mm, of which $35.5mm is multi-draw new money term loan ($20.5mm interim) and $25.3mm is a roll-up (upon entry of a final order) of pre-petition FILO loans on a cashless dollar-for-dollar basis. The DIP features a maturity that is, at its latest, 130 days. The rate is SOFR+7.5% with a 1% SOFR floor on the DIP TL and the roll-up amount, payable in cash. There is also a 2% commitment fee on the DIP TL in cash payable at time of the initial draw on the DIP TL. Finally, there’s also a 2% exit fee.
That’s a whole lot of financial terms and numbers. It’s important to take a moment to appreciate that there’s another significant number at play here: 10.8k. As in 10.8k employees who are about to lose their jobs.
The debtors are represented by Milbank LLP (Dennis Dunne, Lauren Doyle, Michael Price, Brian Kinney) and Morris Nichols Arsht & Tunnell LLP (Robert Dehney Sr., Matthew Talmo, Jonathan Weyand, Erin Williamson) as legal counsel, Alvarez & Marsal LLC (Christopher Wells) as financial advisor and CRO, and Jefferies (Jeffrey Finger) as investment banker. The company intends to file a sale motion with the hope that Jefferies can find a buyer under a rock somewhere. There are some people out there saying that they’re interested. The DIP lender is represented by Proskauer Rose LLP (David Hillman, Megan Volin) and Landis Rath & Cobb LLP (Adam Landis, Richard Cobb, Joshua Brooks). An ad hoc group of lenders who refused to provide financing is represented by Weil Gotshal & Manges LLP (Jeffrey Saferstein, Andriana Georgallas, Chase Bentley, Jessica Falk, Theodore Tsekerides) and Potter Anderson & Corroon LLP (M. Blake Cleary, L. Katherine Good, Brett Haywood, Levi Akkerman).
The company’s first day hearing is scheduled for later today, April 9, 2024, at 2pm ET.
*The filing of the five total debtors started on April 7, 2024, but carried over into April 8, 2024.
**The debtors had been trading on the New York Stock Exchange at the time the PE bros offered a 32% premium to the then-current stock price.
***At the time of this deal, the company’s footprint was up to 387 stores.
Company Professionals:
Legal: Milbank LLP (Dennis Dunne, Lauren Doyle, Michael Price, Brian Kinney) and Morris Nichols Arsht & Tunnell LLP (Robert Dehney Sr., Matthew Talmo, Jonathan Weyand, Erin Williamson)
Financial Advisor/CRO: Alvarez & Marsal LLC (Christopher Wells)
Investment Banker: Jefferies Group LLC (Jeffrey Finger)
Liquidator and Real Estate Advisor: Hilco Merchant Resources LLC & Hilco Real Estate LLC
Claims Agent: Kroll (Click here for free docket access)
Other Parties in Interest:
DIP Agent and DIP Lender (TC Lending LLC) and Pre-petition FILO Lender (Sixth Street Specialty Lending Inc.)
Legal: Proskauer Rose LLP (David Hillman, Megan Volin) and Landis Rath & Cobb LLP (Adam Landis, Richard Cobb, Joshua Brooks)
Ad Hoc Group of Lenders
Legal: Weil Gotshal & Manges LLP (Jeffrey Saferstein, Andriana Georgallas, Chase Bentley, Jessica Falk, Theodore Tsekerides) and Potter Anderson & Corroon LLP (M. Blake Cleary, L. Katherine Good, Brett Haywood, Levi Akkerman)
Financial Advisor: Portage Point Partners
Large Equityholders: Ares Corporate Opportunities Fund III LP, Canada Pension Plan Investment Board, OCM 99 Holdings LLC, Wasserstein Debt Opportunities Master LP, Litespeed Master Fund, Mercer QIF Fund PLC, The Vanderbilt University
Official Committee of Unsecured Creditors
Legal: Pachulski Stang Ziehl & Jones LLP (Bradford Sandler, Robert Feinstein, Steven Golden, Colin Robinson)