Equinox Holdings, Inc. upgraded the debt ratings as the fitness chain operator extended the maturity of its first-lien senior secured revolver to November 2023 from March 2023.
Moody’s said the maturity extension provides Equinox with more time to address the remainder of its first-lien senior secured term loans due March 2024, but the rating agency said the risk of a transaction representing a default is high in the near term due to the company’s weak liquidity and negative cash flow generation.
As a result, Moody’s raised its issuer credit rating on Equinox to ‘CCC-‘ from ‘SD’ and raised its rating on the company’s $71 million first-lien revolver to ‘CCC-‘ from ‘D’.
The negative outlook reflects Moody’s expectation that, despite a continued recovery from pandemic-related lows, tough operating conditions will persist and the company will likely face a liquidity shortfall over the next six months absent a liquidity-enhancing transaction.
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.
Moody’s said, “The ‘CCC-‘ credit rating reflects our belief that a default or a debt restructuring appears highly likely within six months without a significantly favorable change in Equinox’s circumstances. The rating action reflects the risk that the company may be unable to refinance its first-lien revolver at par prior to its maturity in November 2023. Additionally, we believe that even if the company successfully extends the maturity of its revolving credit facility, it is still burning cash and will likely require additional equity support beyond the $135 million its owners contributed in the first three quarters of 2022 to avoid a liquidity crisis. Therefore, we believe the company’s management could seek a distressed debt transaction.
“While Equinox continued to recover members and generate positive EBITDA in the third quarter of 2022, we view the current debt balances as unsustainable. The company has grown its membership balance by 24 percent in 2022, but this is 15.4 percent lower than at the year-end of 2019. At this membership level, the company began generating 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 fixed charges and the refinancing of its approximately $1.4 billion of debt due March 2024 will be difficult. 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 its revenue and EBITDA base grow.
“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.”
