Moody’s Investors Service downgraded Equinox Holdings Inc.’s debt ratings, including its Corporate Family Rating (CFR) to Caa3 from Caa2, and Probability of Default Rating to Caa3-PD from Caa2-PD. Concurrently, Moody’s downgraded Equinox’s first-lien debt instrument ratings to Caa2 from Caa1 and second lien debt instrument ratings to Ca from Caa3. The outlook remains negative.

The downgrade reflects Moody’s view that the probability of a balance sheet restructuring or distressed exchange transactions over the next 12 to 18 months has increased to a high level. Equinox’s geographic concentration in coastal California cities and New York City has materially delayed its ability to return to a normalized operating level relative to its peers. The level of dues-paying members continues to lag Moody’s projections from May 2020. Given the recent performance, Moody’s now expects lease-adjusted debt-to-EBITDA to remain above 12x through FY 2021 based on projected lease-adjusted EBITDA that is close to 30% below the 2019 pre-coronavirus level and views the company’s capital structure as becoming increasingly unsustainable.

The downgrade also reflects Equinox’s weak liquidity. Moody’s expects the company will not have enough cash on hand to satisfy its obligation as a guarantor of SoulCycle’s credit agreement coming February 2021. The company’s unused capacity on its $150 million revolver is also constrained by the springing maximum leverage ratio, which Moody’s believes Equinox would be unable to meet if triggered. The revolver expires in March 2022, and Moody’s is concerned with the company’s ability to extend or refinance the facility when it becomes current early next year.

Ratings Rationale
Moody’s said, “Equinox’s Caa3 CFR reflects its very high leverage with Moody’s lease-adjusted debt/EBITDA expected to remain above 12x through FY 2021 due to earnings decline related to coronavirus crisis and a high debt balance. The rating also reflects Equinox’s weak liquidity and we believe that the company will not have sufficient cash on hand and revolver availability to fund the interim cash burn, club reopening costs and payments due on the SoulCycle guarantee. The rating is also constrained by the highly fragmented and competitive fitness club industry as having high business risk given its low barriers to entry, exposure to cyclical shifts in discretionary consumer spending, and high attrition rates. In addition, the rating considers the company’s geographic concentration in New York City and coastal California, both of which are expected to maintain shelter-in-place mandates for a longer period of time relative to other states. An estimated 84 of the company’s 105 clubs are open, but at a reduced capacity that is leading to paying memberships remaining well below pre-coronavirus levels. However, the credit profile is supported by Equinox’s well-recognized brand names and market position among upscale fitness clubs, and investment in assets that support more technology-enabled fitness delivery such as content.

“The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continues to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of Equinox from the current weak U.S. economic activity and a gradual recovery for the coming months. Although the economic recovery is underway, it is tenuous and its continuation will be closely tied to the containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Specifically, the weaknesses in Equinox’s credit profile, including its exposure to discretionary consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the ongoing coronavirus pandemic and social distancing measures.

“Multiple governance factors are also credit negative including aggressive financial policies under ownership by Related Companies, management and private equity firm L. Catterton. The SoulCycle debt guarantee is a meaningful governance concern. SoulCycle was spun-off from the company in 2016 and Equinox is entitled to only a modest future fee in exchange for the guarantee in October 2019 on SoulCycle’s debt.

“The negative outlook reflects the increased probability for a balance sheet restructuring or distressed exchange over the next 12 to 18 months given Equinox’s very high debt level and weak liquidity. The negative outlook also reflects Moody’s view that Equinox remains vulnerable to coronavirus disruptions and unfavorable shifts in discretionary consumer spending that could weaken estimate recovery in a default scenario.”

Photo courtesy Equinox