Moody’s Ratings changed its debt rating outlook on Life Time to positive from stable as the fitness club operator continues to reduce leverage through earnings growth and debt repayment. The change largely reflects Life Time’s proposed $1 billion senior secured first lien term loan due 2031.
Concurrently, Moody’s assigned a B2 rating to the proposed $1 billion senior secured first lien term loan due 2031 and downgraded the rating on the senior secured revolving credit facility to B2 from B1. Moody’s took no action on the existing B1 rating on the senior secured notes due 2026 and the Caa1 rating on the senior unsecured notes due 2026. Moody’s upgraded Life Time’s speculative grade liquidity (SGL) rating to SGL-2 from SGL-3.
Life Time will use the proceeds from the proposed term loan issuance along with another $400 million of secured debt to repay the existing $925 million senior secured notes due 2026, redeem the existing $475 million senior unsecured notes due 2026 and pay transaction fees and related costs. Moody’s took no action on the respective B1 and Caa1 ratings for the 2026 secured and unsecured notes and the firm expects to withdraw the ratings of these instruments because it anticipates they will be redeemed in full in conjunction with the transaction. The senior secured bank credit facility will consist of the new $650 million extended revolver expiring in 2029, which was put in place in September 2024, and the proposed $1 billion first lien term loan due in 2031.
The transaction is credit-positive because it will improve liquidity by addressing the company’s meaningful 2026 debt maturities while also reducing interest expenses.
Moody’s wrote, “We changed the outlook to positive because the company continues to reduce leverage through earnings growth and debt repayment. Life Time also continues to expand the earnings base through same-center revenue growth, good cost discipline and new center development. Debt-to-EBITDA leverage, on a Moody’s adjusted basis, is forecasted to decline below 5x in 2025, driven by earnings growth as Life Time continues to scale up its business operations, with planned new location openings of 8 to 14 per year. Life Time also continues to expand its luxury amenities and service offerings across the existing base of venues. As a result, total memberships for the year-to-date period ending June 30, 2024, increased 5.5 percent, driving higher in-center revenue and higher membership dues, with total revenue increasing 17.9 percent for the same period. Life Time favorably utilized the approximate $124 million net proceeds from an August 2024 secondary common stock offering to fund a $110 million term loan paydown and bolster cash, and we expect the company will pay down revolver borrowings from free cash flow.
“We, nevertheless, affirmed the existing B2 CFR because the company’s free cash flow remains low due to significant capital investments in new and existing facilities. New locations typically require investments of $25 to $30 million net per location, with ground-up construction builds between $55 to $65 million per location, which, along with upgrades to existing facilities and continued development of digital offerings, translates into high recurring investments. New location openings carry a degree of execution risk related to high startup costs, competition and membership recruitment, which could delay completion or increase costs.
“We downgraded the rating on the $650 million senior secured revolving credit facility to B2 from B1 because the redemption of the senior unsecured notes removes loss absorption debt cushion, and the secured debt now represents the preponderance of the company’s debt structure. These changes reduce estimated recovery in the event of a default,” concluded Moody’s.
Image courtesy Life Time
