S&P Global Ratings said it lowered the debt ratings on Equinox Holdings Inc. due to plans to issue an unrated $150 million first-lien B-2 term loan due 2024.

The rating agency said the new issue will have the same terms and will be pari passu with its existing first-lien facility (consisting of a $150 million revolver due 2022 and a $1.025 billion B-1 term loan due 2024).

As a result, S&P said recovery prospects are lowered for existing first-lien lenders under its recovery analysis because of the incremental first-lien debt in the capital structure, and S&P is revising its recovery rating on the company’s existing first-lien revolver and term loan to ‘3’ from ‘2’. The ‘3’ recovery rating reflects 50 percent to 70 percent recovery prospects (round estimate: 65 percent) under S&P’s default assumptions. As a result, the rating agency said it is lowering its issue-level rating on the first-lien revolver and term loan to ‘CCC’ from ‘CCC+’.

S&P added, “In addition, our ‘CCC’ issuer credit rating and negative outlook are unchanged. We stated on May 28, 2020 that Equinox had cash on hand at the end of the first-quarter 2020 in March of $183 million and $140 million drawn on the company’s $150 million revolver and that this level of cash may be less than adequate to cover the anticipated cash burn over the next few months. While the new term loan proceeds add liquidity, under our current base case the incremental cash may cover a few additional months of cash burn. It is our understanding that Equinox has reopened clubs in Texas, Vancouver, and Florida but not the large majority of clubs on the east and west coasts primarily in New York and California. While clubs are closed, we have assumed anticipated cash needs include primarily debt service and significantly reduced labor costs. Even if all clubs reopen in the third quarter, depending on how quickly revenue recovers, Equinox may continue to burn cash for several months after clubs reopen while it brings its employees back from furloughs, pays vendors (including rent) to remain current and brings facilities back online.

“In addition, it is our understanding that Equinox has entered into an agreement with an affiliate, also controlled by Related Companies, whereby the affiliate will contribute up to $125 million of cash equity to cover Equinox’s partial guarantee of SoulCycle’s credit facility. The guarantee requires Equinox to purchase the higher of $72.8 million of SoulCycle’s debt, or the amount necessary to reduce SoulCycle’s leverage, to 5x in any quarter ending before the February 15, 2021, payment due date. The SoulCycle credit facility totals $265 million, and it is unclear to us at this time whether the cash equity contribution would cover the full guarantee payment obligation owed by Equinox when it becomes due February 15, 2021, which may present an additional use of Equinox’s liquidity at that time. If the equity contribution does not cover the full guarantee payment, depending on the company’s liquidity position at that time, we would view any further deferrals beyond February 15, 2021 as tantamount to a default.”

Photo courtesy Equinox