Lenders to Fitness International LLC's LA Fitness have reportedly hired restructuring adviser PJT Partners to represent them in talks with the gym owner, according to The Wall Street Journal. The hiring comes ahead of the expiration of a forbearance agreement in October, the report said.
Robert Wilson, general counsel at LA Fitness, confirmed that the lenders had hired PJT, the report stated. Both the Journal and Bloomberg reported that the gym chain has been in touch with the lenders and their adviser. Wilson said LA Fitness hasn't hired its own advisers and is not currently weighing a bankruptcy filing, the Journal report said.
Gym owners have been particularly hard hit by the pandemic, with its social distancing mandate and stay-home orders. The owner of Gold's Gym filed for Chapter 11 protection in May; 24 Hour Fitness filed for bankruptcy in June; and Town Sports, the owner of New York Sports Clubs, Boston Sports Clubs and Lucille Roberts, filed to reorganize earlier this month.
In April, S&P Global Ratings downgraded Fitness International to CCC+ and developing, from B and CreditWatch Negative. In August, Ratings revised the outlook to negative, citing slower revenue recovery in the second half of 2020 than originally anticipated. Ratings said LA Fitness entered into forbearance agreements on April 7 and June 26 to avoid breaching certain covenants.
Ratings estimated the company had more than $325 million in cash on its balance sheet as of April 1 after having fully drawn its $400 million revolver. According to Moody's, Fitness International has $1.7 billion in total debt.
Moody's downgraded Fitness International in August to Caa3, from Caa1, citing concerns about the surge in COVID-19 cases and re-closings of gyms across southern and western U.S. The company's senior secured first-lien revolving credit facility and first-lien term loans were both lowered as well, to Caa3, from B3.
Moody's specifically cited closures in Arizona and California, where Fitness derives slightly more than 20% of its total revenue, and the risk of further gym closures throughout the U.S. during the remainder of 2020 and into 2021. As a result, the rating agency projected weaker earnings than it originally anticipated, pushing its projection for lease-adjusted debt-to-EBITDA to move “well above 8x” by the end of 2020, with leverage remaining high in 2021.
Moody's also expressed concern about low gym utilization rates due to social distancing precautions and lower discretionary consumer income further eroding the company's earnings base as well as its liquidity. With the $1.7 billion debt load, plus rent and operating lease obligations, the rating agency stated the company's capital structure was “becoming increasingly unsustainable in the current environment.”
PJT did immediately respond to a request for comment.
Fitness International is a non-franchised fitness club operator with about 734 clubs in 27 states, the District of Columbia, and two Canadian provinces under the LA Fitness brand name. It is backed by Seidler Equity Partners, Chinyol Yi and Louis Welch, who serves as the company's co-CEO and president.