Life Time Inc. plans to issue $475 million of senior unsecured notes due 2026 and will use the proceeds primarily to refinance its existing $450 million senior unsecured notes due 2023. The refinancing of its senior unsecured notes extends the unsecured maturity profile from 2023 to 2026.
Life Time also closed its $925 million senior secured notes due 2026 and issued a new $850 million senior secured term loan B due 2024 after repaying a portion of the outstanding balance on its previous loan.
Moody’s assigned a ‘CCC-‘ issue-level rating and ‘6’ (rounded estimate: 0 percent) recovery rating to the proposed notes.
Moody’s wrote, “Life Time’s Caa1 CFR reflects its very high leverage with Moody’s adjusted debt-to-EBITDA expected to remain above 10x over the next year as the result of significant earnings declines due to reductions in membership and facility utilization from the coronavirus pandemic in the US. The rating is constrained by the company’s aggressive growth policy and historically high reliance on external financing to support its new club openings including sale-leaseback transactions, landlord incentives and revolver borrowings. The rating also reflects Life Time’s moderate geographic concentration and the business risks associated with the highly fragmented and competitive fitness club industry, which includes high membership attrition rates and exposure to shifts in consumer spending and economic cycles.
Life Time’s credit profile benefits from its focus on a more affluent member base and expanded service offerings relative to most fitness clubs that make it less susceptible to increasing competition from the value-priced fitness clubs. The larger sized and country club-like facilities with outdoor amenities such as pools and tennis courts will continue to enable Life Time to fare better during the coronavirus pandemic and subsequent recovery versus its peers with only indoor gyms. The rating is also supported by the company’s solid asset base from owning about 42 percent of its clubs, of which 29 are pledged to the first lien bank credit facilities. Monetization of real estate provides an additional option to bolster liquidity if needed and distinguishes Life Time from most other fitness clubs where facilities are primarily leased. The company was able to access the sale-leaseback market even during the worst period of the pandemic in 2020, which attests to the value of its real estate assets.”
Separately, S&P assigned a ‘CCC-‘ issue-level rating and ‘6’ (rounded estimate: 0 percent) recovery rating to the proposed notes.
S&P wrote, “Our ‘CCC+’ issuer credit rating remains unchanged despite the company’s very high leverage through 2022 because it has adequate liquidity, no near-term maturities, and we do not envision an event of default over the next 12 months. Life Time’s recent secured notes issuance, the maturity extensions of its secured revolver and term loan B, the proposed senior unsecured note refinancing transaction, its increased cash balances, and demonstrated ability to raise capital through sale-leaseback transactions (even amid the stressed industry conditions in 2020) could provide it with sufficient runway to avoid a near-term default or restructuring even if the COVID-19 immunization efforts extend beyond mid-2021. However, under our current base-case forecast, we believe the company’s membership base will be about 20% below its pre-pandemic level as of the end of 2020 before recovering slowly over the next two years. This indicates its revenue will be below 2019 levels this year while it maintains very high leverage through 2022. State and local capacity restrictions at Life Time’s facilities, the intermittent state-mandated closures of its fitness clubs, and ongoing consumer apprehension about returning to the gym could slow the recovery in its revenue, EBITDA, and cash flow even after coronavirus vaccines are made widely available in mid-2021.”
Photo courtesy Life Fitness
