Life Time Inc.’s debt rating was downgraded by Standard & Poors due to pandemic-related closures.

The rating agency said as a result of the coronavirus pandemic, Life Time has closed all of its fitness clubs in the U.S. and frozen all of its club memberships. While memberships are frozen, Life Time Inc. will face a temporary zero- or low-revenue scenario.

S&P assumes that Life Time will experience a “significant spike in leverage and a material cash burn rate” while its gyms are closed that may use a substantial portion of the company’s liquidity. As a result, Life Time’s issuer credit rating was lowered to ‘CCC+’ from ‘B-‘ with a developing outlook, its senior secured issue-level rating was reduced to ‘B’ from ‘B+’, and its senior unsecured issue-level rating to ‘CCC-‘ from ‘CCC’. The recovery ratings remain ‘1’ and ‘6’, respectively.

S&P removed all of the ratings on the company from Credit Watch, where they were placed with negative implications on March 20, 2020

S&P said, “The downgrade reflects our assumption that Life Time will experience a spike in leverage and a significant cash burn rate while gyms are closed and possibly during the early months of re-openings, which could use a substantial portion of the company’s liquidity and possibly result in an unsustainable capital structure.  We assume no revenue while gyms are closed, and the beginning of a recovery in the third quarter of 2020 under our base case for virus containment midyear 2020. In our base case, we estimate revenue could ramp to 50 percent of historical revenue in the third quarter of 2020, and improve further in the fourth quarter.

“The developing outlook means an upgrade or downgrade are equally likely over the next 12 months depending on the duration of gym closures, economic conditions, consumer behavior and the company’s ability to preserve its liquidity. The upside reflects the possibility for leverage to improve under our midyear containment and second-half recovery scenario to a level in line with a higher rating. The downside reflects the possibility the company may face a near-term default, in the absence of a liquidity-enhancing transaction, under its current cash burn rate if containment and club re-openings do not occur midyear.

“We could lower our rating if we expect the company’s liquidity position to worsen, or we believe it is likely to default or enter into a debt restructuring of some form in the next 12 months.

“Although unlikely over the next several quarters and until gyms reopen and ramp up revenue, we could consider a one-notch upgrade or more if we believe the company can sustain positive cash flow and is likely to materially reduce leverage to below 7x following the COVID-19 containment period.”

Photo courtesy Life Time Fitness