S&P Global Ratings revised its debt ratings outlook on fitness club operator Life Time Inc. to negative from developing because of significant near-term downside risks tied to COVID-19. The rating agency said in a statement, “We no longer believe we could raise ratings in the next 12 months.”
S&P noted that Life Time closed a 364-day $101.5 million loan funded by the company’s ownership group on a pro-rata basis, increasing liquidity while the company navigates the impact of the pandemic and club closures. The loan was made to unrestricted subsidiaries under the company’s senior secured credit facility, and the company contributed four clubs in the U.S. and Canada to these subsidiaries.
Despite the incremental liquidity, the recent surge in confirmed COVID-19 cases has resulted in mandatory gym closures in 30 California counties and may cause mandated gym re-closures in additional states in the U.S. South, Southwest and West, S&P said. While Life Time intends to continue partial operations whenever possible, these mandates may cause the company’s re-opening plans in the second half of 2020 to produce a slower revenue recovery for an extended period of time.
S&P wrote, “Even though Life Time currently has reopened about 85 percent of gyms, we assume that as a result of the recent surge in COVID-19 cases, and California’s July 13, 2020 order that fitness clubs in 30 counties close, Life Time will be required to re-close indoor operations at its recently reopened gyms located in California and may be required to partially or fully reclose gyms in states in the U.S. South, Southwest,and West, possibly through the third quarter of 2020. In our updated base case, we estimate revenue could decline 40 percent or more in 2020 (compared with about one-third previously) as a result of partial gym re-closures, the recession and member concerns around returning safely to the gym, and we now expect our measure of the company’s lease-adjusted gross leverage could be above 7x through 2021 (compared with below 7x previously), even under our base case for recovery in 2021.”
S&P affirmed its ‘CCC+’ issuer credit rating on Life Time, its ‘B’ issue-level rating on the company’s senior secured credit facility, and its ‘CCC-‘ issue-level rating on its senior unsecured 8.5 percent notes. The recovery ratings remain ‘1’ and ‘6’, respectively.
The negative outlook reflects a “very high leverage” through 2021 and the potential for significant revenue disruption caused by intermittent mandatory regional club closures as a result of COVID-19. The ratings agency wrote, “While Life Time’s recently issued $101.5 million term loan from its owners has provided incremental liquidity, the 364-day term means it will need to be refinanced in 2021 unless the company’s equity holders choose to extend the maturity, which we believe they are likely to do if the company does not have enough cash to pay the loan. In addition, the recent growth in COVID-19 cases and the recent partial shut down of gyms in Arizona and California. indicate that another wave of fitness club closures is plausible and that the company could face another reduced revenue scenario in the coming months. In this scenario, if we believed a distressed exchange or conventional default were likely in the next year, we would lower the rating.”
Photo courtesy Life Time