S&P Global Ratings lowered its debt ratings of Equinox Holdings Inc. over concerns the fitness chain operator will face challenges meeting commitments under its $76 million revolving credit facility due March 2023. Additionally, the remainder of the company’s first-lien senior secured term loans are coming due March 2024.
Because of these sizeable maturities, weak liquidity, and negative cash flow generation, S&P said the risk of a default situation is “very high in the near term.”
As a result, S&P lowered its issuer credit rating on Equinox to ‘CCC-‘ from ‘CCC’ and all the company’s issue-level ratings down by one notch. The negative outlook reflects S&P’s expectation that tough operating conditions will persist, and the company will likely face a liquidity shortfall over the next six months absent a liquidity-enhancing transaction.
S&P said, “The downgrade reflects the risk that the company may be unable to refinance its first-lien revolver at par prior to its maturity in March 2023. Additionally, we believe that even if the company successfully extends the maturity of its revolving credit facility, it is still burning significant amounts of cash. That means it would likely require additional equity support beyond the $135 million its owners contributed in the first three quarters of 2022 to maintain a reduced level of cash burn and avoid a liquidity crisis. Because of these factors, we believe the company’s management could seek a distressed exchange or offer at less than par that creditors could agree to.
“While Equinox has continued to recover members and generate positive EBITDA in the third quarter of 2022, we view the current debt balances as unsustainable in the long term.
“While the company has grown its membership balance by 16.8% since the start of 2022, this membership balance remains 17.5% lower than at year-end 2019. At this membership level, the company has begun to generate slightly positive EBITDA on a reported basis, and as the company adds members, it will likely see higher incremental revenue flow through to EBITDA and cash flow.
“However, we believe that at the current pace of membership and revenue growth, the company is unlikely to generate sufficient cash flow to support its current debt balances and refinance the approximately $1.4 billion of debt due in 2024. Additionally, the company still owes its landlords $161.1 million of unpaid cash rent as of Sept. 30, 2022, and this balance could prolong the company’s cash burn even as it grows its revenue and EBITDA base.
“The negative outlook reflects our expectation that tough operating conditions will persist and the company will likely face a liquidity shortfall over the next six months absent a liquidity-enhancing transaction.
“We could lower our ratings on Equinox to ‘CC’ if we believed a default to be a virtual certainty, including the company announced it will miss an interest or principal payment or an announcement of an exchange offer or similar restructuring we classify as distressed.
“We could raise the ratings on Equinox if we no longer believed the company to be at risk of default within the next six months.”
Equinox Holdings operates lifestyle fitness brands, including Equinox, Equinox Hotels, Precision Run, Project by Equinox, Equinox Explore, Equinox Media, Furthermore, Pure Yoga, Blink Fitness, and SoulCycle.
