New York, June 01, 2021 — Moody’s Investors Service, (“Moody’s”) upgraded Fitness International, LLC’s (“Fitness International”) Corporate Family Rating (“CFR”) to Caa1 from Caa3, Probability of Default Rating to Caa1-PD from Caa3-PD, and first lien bank credit facilities ratings (revolver and term loans) to B3 from Caa3. The outlook is positive.
The company raised $525 million of preferred equity in April, of which $360 million was used to pay down the revolver, $105 million was used to pay down the Main Street Loan, with the remaining amount added to the balance sheet as cash to boost liquidity.
The upgrade reflects the reduced likelihood of default over the next year due to the company’s much improved liquidity because of the significant equity investment. Fitness International’s current total liquidity is about $730 million, consisting of about $370 million of cash and full access to its undrawn $400 million revolver due January 2025 ($362 million availability net of letter of credit). This liquidity will provide flexibility to fund operations and manage the business as the company starts to recover in 2021. The company also received a covenant waiver for its revolver and term loan for six quarters, which we view as positive. Furthermore, the company will have no meaningful maturities until 2025. The cash resources provide good coverage of the $48 million per annum of required amortization on the term loan A.
Moody’s expects Fitness International’s operating performance including membership trends to gradually recover in 2021 as a higher share of the public receives vaccinations and the coronavirus pandemic subsides. However, the decline in dues paying members has been meaningful since the start of the coronavirus pandemic and it will take time for membership to recover. Moody’s lease adjusted debt-to-EBITDA spiked to 15x for the trailing twelve months ended March 31, 2021 (pro forma for the preferred equity raise and the debt paydown). However, Moody’s expects the lease adjusted debt-to-EBITDA leverage to decline quickly to below 6.5x over the next 12 to 18 months along with the projected earnings recovery.
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