Research: Rating Action: Moody’s upgrades Fitness International’s CFR to B3; outlook stable

New York, June 29, 2022 — Moody’s Investors Service, (“Moody’s”) upgraded Fitness International, LLC’s (“Fitness International”) Corporate Family Rating (“CFR”) to B3 from Caa1, Probability of Default Rating to B3-PD from Caa1-PD, and first lien financial institution credit score services scores (revolver and time period loans) to B2 from B3. The outlook is steady.

The CFR improve to B3 displays Moody’s expectation that working efficiency together with membership tendencies will proceed to recuperate in 2022 and 2023 as the specter of the coronavirus pandemic subsides. Membership and income as of May has already recovered to the mid to excessive 80% of the pre-pandemic stage and Moody’s  expects income will proceed to recuperate to the low 90% of pre-pandemic ranges in fiscal 12 months 2022 ending in December and totally recuperate by the tip of FY2023. Lease adjusted debt-to-EBITDA leverage is about 5x for the LTM interval ended March 31, 2022 and Moody’s expects leverage will decline and method 4x by the tip of FY23 on account of a continued earnings restoration and a few voluntary debt compensation. Moody’s additionally expects the corporate to take care of enough liquidity over the following 12 months together with constructive free money circulate.

The firm’s enough liquidity is supported by an approximate $359 million money steadiness at March 31, 2022 and entry to an undrawn $400 million revolver due January 2025 ($362 million availability web of letters of credit score). Additionally, Moody’s expects free money circulate to exceed $100 million (excluding any required tax distributions) over the following 12 months on account of greater earnings and moderation of deferred hire funds. These money sources will present ample protection of the $48 million every year of required amortization on the time period mortgage A (required amortization will enhance to about $72 million in 2023) in addition to funding further voluntary compensation of debt in FY22. Its monetary upkeep covenants (a most leverage check and a minimal mounted cost protection check) will resume on September 30. The firm’s $250 million minimal liquidity covenant will finish upon supply of the compliance certificates for the September 30, 2022 reporting interval. Given the anticipated voluntary debt paydown and continued restoration in working efficiency, Moody’s expects the corporate will be capable to amend the upkeep covenants if wanted in FY22, and thus, count on compliance with the covenants over the following 12 months. Furthermore, the corporate has no significant maturities till 2025 except for the sizable time period mortgage amortization.

Moody’s took the next score actions:

Upgrades:

..Issuer: Fitness International, LLC

…. Corporate Family Rating, Upgraded to B3 from Caa1

…. Probability of Default Rating, Upgraded to B3-PD from Caa1-PD

….Senior Secured 1st Lien Revolving Credit Facility, Upgraded to B2 (LGD3) from B3 (LGD3)

….Senior Secured 1st Lien Term Loan A, Upgraded to B2 (LGD3) from B3 (LGD3)

….Senior Secured 1st Lien Term Loan B, Upgraded to B2 (LGD3) from B3 (LGD3)

Outlook Actions:

..Issuer: Fitness International, LLC

….Outlook, Changed To Stable From Positive

RATINGS RATIONALE

Fitness International’s B3 CFR broadly displays its excessive leverage with Moody’s lease adjusted debt-to-EBITDA leverage of about 5x for the trailing twelve months ended March 31, 2022. Moody’s expects debt-to-EBITDA leverage to proceed to say no and method 4x over the following 12 months on account of a continued earnings restoration in addition to some voluntary debt paydown. The score additionally displays Fitness International’s geographic focus in California and Florida and rising competitors from technology-based health companies that aren’t tied to a facility. Furthermore, the score is constrained by the extremely fragmented and aggressive health membership business with excessive attrition charges, Fitness International’s positioning within the business’s extra pressured mid-tier value level, in addition to publicity to cyclical shifts in discretionary shopper spending. However, the score is supported by the corporate’s well-recognized model title, place as the biggest non-franchisee health heart by variety of golf equipment, in addition to shoppers’ elevated consciousness of the significance of well being and wellness.

Moody’s regards the coronavirus outbreak as a social danger underneath our ESG framework, given the substantial implications for public well being and security. Although an financial restoration is underway, its continuation can be intently tied to containment of the virus. As a consequence, there’s uncertainty round our forecasts.

Fitness golf equipment have delicate buyer knowledge together with data associated to well being, exercise schedules, and bank cards. Protecting knowledge safety is thus necessary to attracting and retaining clients and will increase working prices. Rising labor prices are a credit score adverse challenge that would increase working prices and weaken service ranges by limiting membership staffing. Demographic and societal tendencies towards well being and wellness are favorable social components supporting demand development, however rising competitors from technology-oriented exercises is prone to weaken membership for facilities-based health suppliers until they make investments to broaden their service choices.

The firm is wholly-owned by founding members and the Seidler household. Financial coverage is anticipated to be aggressive together with excessive leverage. The new investor group that participated in the popular inventory providing in 2021 is considered positively because it demonstrates exterior help for the corporate’s technique and restoration prospects. Prior to the coronavirus pandemic in 2020, the corporate had been proactively paying down debt and Moody’s expects the corporate will resume prioritizing debt compensation after earnings restoration publish the pandemic.

Moody’s views environmental dangers as low.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The steady outlook displays Moody’s view that debt-to-EBITDA leverage will decline to approaching 4x over the following 12 months on account of continued earnings restoration and a few voluntary debt paydown. The steady outlook additionally displays Moody’s expectation for enough liquidity with not less than $100 million of free money circulate (excluding any required tax distributions) over the following 12 months.

Ratings might be upgraded ought to membership ranges, working efficiency, credit score metrics and liquidity proceed to enhance. Quantitatively, Moody’s adjusted debt-to-EBITDA sustained beneath 4.5x together with good liquidity and good free money circulate could be needed for an improve.

The scores might be downgraded if working efficiency doesn’t enhance as anticipated, there’s renewed decline in membership ranges, or rising labor or different working prices weaken the EBITDA margin. A downgrade might additionally happen if liquidity deteriorates or debt-to-EBITDA leverage sustained above 6x.

The principal methodology utilized in these scores was Business and Consumer Services printed in November 2021 and obtainable at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies web page on https://ratings.moodys.com for a replica of this technique.

Fitness International, LLC is the biggest non-franchised health membership operator within the United States with about 731 golf equipment in 27 US states, the District of Columbia, and a pair of Canadian provinces underneath the LA Fitness, City Sports Club and Esporta Fitness model names. Common fairness within the firm is wholly owned by founding members and the Seidler household. Revenue for the LTM interval ended March 31, 2022 was about $1,890 million.

REGULATORY DISCLOSURES

For additional specification of Moody’s key score assumptions and sensitivity evaluation, see the sections Methodology Assumptions and Sensitivity to Assumptions within the disclosure type. Moody’s Rating Symbols and Definitions may be discovered on https://ratings.moodys.com/rating-definitions.

For scores issued on a program, collection, class/class of debt or safety this announcement offers sure regulatory disclosures in relation to every score of a subsequently issued bond or word of the identical collection, class/class of debt, safety or pursuant to a program for which the scores are derived solely from present scores in accordance with Moody’s score practices. For scores issued on a help supplier, this announcement offers sure regulatory disclosures in relation to the credit standing motion on the help supplier and in relation to every explicit credit standing motion for securities that derive their credit score scores from the help supplier’s credit standing. For provisional scores, this announcement offers sure regulatory disclosures in relation to the provisional score assigned, and in relation to a definitive score which may be assigned subsequent to the ultimate issuance of the debt, in every case the place the transaction construction and phrases haven’t modified previous to the project of the definitive score in a way that might have affected the score. For additional data please see the issuer/deal web page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit score help from the first entity(ies) of this credit standing motion, and whose scores might change because of this credit standing motion, the related regulatory disclosures can be these of  the guarantor entity.  Exceptions to this method exist for the next disclosures, if relevant to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The scores have been disclosed to the rated entity or its designated agent(s) and issued with no modification ensuing from that disclosure.

These scores are solicited. Please confer with Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings obtainable on its web site https://ratings.moodys.com.

Regulatory disclosures contained on this press launch apply to the credit standing and, if relevant, the associated score outlook or score overview.

Moody’s basic rules for assessing environmental, social and governance (ESG) dangers in our credit score evaluation may be discovered at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one in every of Moody’s associates exterior the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further data on the EU endorsement standing and on the Moody’s workplace that issued the credit standing is accessible on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one in every of Moody’s associates exterior the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA underneath the legislation relevant to credit standing companies within the UK. Further data on the UK endorsement standing and on the Moody’s workplace that issued the credit standing is accessible on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on adjustments to the lead score analyst and to the Moody’s authorized entity that has issued the score.

Please see the issuer/deal web page on https://ratings.moodys.com for extra regulatory disclosures for every credit standing.

Joanna O’Brien
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

https://www.moodys.com/research/Moodys-upgrades-Fitness-Internationals-CFR-to-B3-outlook-stable–PR_467410

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