Moody’s Investors Service upgraded the debt ratings of Fitness International, LLC, the parent of LA Fitness, Esporta Fitness and City Sports Club.

Fitness International’s Corporate Family Rating (CFR) was raised to B3 from Caa1, Probability of Default Rating to B3-PD from Caa1-PD and first-lien bank credit facilities ratings (revolver and term loans) to B2 from B3.

The outlook is stable.

The CFR upgrade to B3 reflects Moody’s expectation that operating performance, including membership trends, will continue to recover in 2022 and 2023 as the threat of the coronavirus pandemic subsides.

Membership and revenue as of May have recovered to the mid-to-high 80 percent of the pre-pandemic level, and Moody’s expects revenue will continue to recover to the low 90 percent of pre-pandemic levels in the fiscal year 2022 ending in December and fully recover by the end of FY2023.

Lease-adjusted debt-to-EBITDA leverage is about 5x for the LTM period ended March 31, 2022, and Moody’s expects leverage will decline and approach 4x by the end of FY23 due to a continued earnings recovery and some voluntary debt repayment. Moody expects the company to maintain adequate liquidity over the next year, including positive free cash flow.

Moody’s said the company’s adequate liquidity is supported by an approximate $359 million cash balance at March 31, 2022, and access to an undrawn $400 million revolver due January 2025 ($362 million availability net of letters of credit).

Moody’s also expects free cash flow to exceed $100 million, excluding required tax distributions, over the next year due to higher earnings and moderation of deferred rent payments. These cash sources will provide ample coverage of the $48 million per annum of required amortization on the term loan A (required amortization will increase to about $72 million in 2023) and fund additional voluntary repayment of debt in FY22. Its financial maintenance covenants (a maximum leverage test and a minimum fixed charge coverage test) will resume on September 30. The company’s $250 million minimum liquidity covenant will end on delivery of the compliance certificate for the September 30, 2022 reporting period.

Given the expected voluntary debt paydown and continued recovery in operating performance, Moody expects the company will amend the maintenance covenants, if needed, in FY22 and, thus, expect compliance with the covenants over the next year. Furthermore, the company has no meaningful maturities until 2025 besides the sizable term loan amortization.