S&P Global Ratings lowered the debt rating of Equinox Holdings Inc. following the fitness club operator’s closing on an amendment to its partial guarantee on the credit facility of its affiliate company SoulCycle Inc. that will allow it to defer its required repurchase of the affiliate’s debt to February 2021.

The downgrade follows Equinox’s completion of an amendment to its partial guarantee on affiliate company SoulCycle Inc.’s credit facility that will allow it to delay a mandatory payment, which S&P views as tantamount to a default. On May 15, 2020, the company signed an amendment to its limited guarantee agreement on SoulCycle Inc. to defer a $72.8 million mandatory debt repurchase due May 15, 2020, to Feb. 15, 2021. The amendment requires the company to pay the higher of $72.8 million or the amount necessary to reduce SoulCycle’s leverage to 5 times in any quarter ending before February 2021.

S&P said, “We view the transaction as distressed and tantamount to default because Equinox did not meet its financial obligation under the original guarantee. In addition, we view the company as being in distress because of its current cash burn rate and very high anticipated leverage due to the club closures stemming from the coronavirus. We also saw a realistic possibility for a conventional default at our previous ‘CCC’ issuer credit rating prior to the deferral and note that SoulCycle’s lenders have not received offsetting compensation for the deferral.”

S&P lowered its issuer credit rating on Equinox to ‘SD’ (selective default) from ‘CCC’. The ‘CCC+’ issue-level rating and ‘2’ recovery rating on the company’s senior secured first-lien facility and its ‘CC’ issue-level rating and ‘6’ recover rating on its senior secured second-lien facility remain unchanged.

S&P said it plans to raise ts issuer credit rating on Equinox as soon as practical, likely in the next several days, to a level that reflects the ongoing risk of a conventional default.

S&P said, “Equinox is burning cash while its fitness clubs remain closed because of COVID-19. We believe the company entered into the amendment to preserve its liquidity because of the duration of its club closures, and thus its cash burn, remains unknown. In addition, its recovery could be hampered by social distancing measures and weak consumer discretionary spending even after its clubs re-open given our economists’ view that the U.S. will enter a recession this year.

“While the company has pledged the assets of its Canadian and U.K. subsidiaries as a component of its guarantee amendment, we do not believe this pledge represents offsetting compensation for the lenders given the high degree of uncertainty in the valuation of these assets and the elevated likelihood that the debt repurchase requirement will grow significantly in value before its Feb. 15, 2021, due date.

“We expect to reevaluate our issuer credit rating on Equinox and the company’s capital structure in the near term. We will likely raise our issuer credit rating on the company to ‘CCC’ to reflect its very high anticipated leverage and the likelihood that it will experience difficulty in meeting its financial obligations given its current cash burn.

“S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here — spglobal.com/ratings. As the situation evolves, we will update our assumptions and estimates accordingly.”

Photo courtesy Equinox