Town Sports International LLC, the parent of New York Sports Clubs, Boston Sports Clubs, and numerous other gyms, on Monday, became the latest fitness chain to land in bankruptcy court due to the pandemic.
“COVID-19 has hit the health club industry particularly hard, and the industry has seen many closures and bankruptcy filings, including some of the largest national health clubs,” wrote Phillip Juhan, CFO of Town Sports, in an affidavit filed in Delaware’s bankruptcy court.
Gold’s Gym filed for bankruptcy protection in May, followed by 24 Hour Fitness Worldwide in June.
Juhan said that on March 16, the company was required to close approximately 95 percent of its 186 clubs pursuant to orders from local authorities designed to combat the spread of COVID-19. By the end of March, the remaining clubs in Florida were mandated to close as well.
Monthly membership revenues were suspended effective May 1, notwithstanding the temporary closure provisions set forth in agreements. Juhan wrote, “In short, the debtors have not generated any material operating revenues for nearly five months and have only begun to generate operating revenues as of September 1 in connection with the reopening of the majority of their facilities.”
Immediate steps were taken to reduce operating costs and to conserve cash. On March 13, the company borrowed $12.5 million from the 2013 Revolving Loan Facility and have continued to actively manage cash flow on a daily basis. Upon closure of the clubs, all non-executive employees working at clubs were informed that their employment had been terminated. Additionally, with the assistance of advisors, Town Sports engaged in conversations with landlords to discuss rent relief.
With most clubs closed for the past four-to-five months, Juhan said Town Sports remained cautiously optimistic for a reopening strategy. However, with recent “spikes” in COVID-19 cases, many states have delayed the company’s ability to reopen clubs and its reopening plan has taken longer than anticipated. Added Juhan, “Similarly, members are justifiably adhering to social distancing guidelines, and many remain cautious about and re-entering health clubs.”
Town Sports has focused on identifying the steps necessary to realign its business based on COVID-19 challenges.
These measures include ensuring clubs meet all health and safety guidelines and are safe for the company’s members and staff. A comprehensive safety plan was prepared, and the company has “incurred, and will continue to incur, significant costs related to increased training, more comprehensive cleaning, disinfecting, and health screening protocols, and enhanced facilities maintenance” to ensure it meets the health and safety needs of members and employees.
In addition, Town Sports has taken necessary actions to right-size its balance sheet and, with the assistance of real estate advisors, re-assess its real estate and club footprint as part of its overall strategic plan.
“It is the debtors’ goal to use the tools of the Bankruptcy Code to restructure financially, a process that is necessary to reflect the new reality and headwinds that face health clubs generally, such as those that the company operates, and to place the company on a strong footing to safely and successfully resume business consistent with the COVID Plan and the mandates of state and local governments. As the focus on exercise and overall healthy lifestyles continue to impact the health club industry, the Company believes that it is well-positioned to benefit from these dynamics as a large operator with recognized brand names, leading regional market shares and established operating history.
Town Sports said two separate groups of its lenders have expressed interest in buying the Elmsford, NY-based company as a going concern and offering debtor-in-possession financing to help it restructure.
In the near-term, he noted that limited revenues for several months, Town Sports’ liquidity is “severely limited”, and the company has been in close communications and discussions with an ad hoc group of senior term loan lenders to secure debtor-in-possession financing to allow for a successful re-opening and restructuring process.
Town Sports said it preferred a proposal from Kennedy Lewis Investment Management, its largest secured debtholder, including the possible assumption of 94 leases, to a proposal from private equity firm Tacit Capital and other lenders involving fewer leases.
Town Sports plans to emerge as an “even stronger company, better positioned to serve members into the future,” it said in a statement while also adding that it’s “deeply grateful” for its customers’ “continued loyalty.”
As of the petition date, Town Sports has reopened approximately 95 of its facilities. Added Juhan, “As the debtors continue the reopening process, they believe these Chapter 11 cases are critical in our reopening plans. Access to DIP financing and further liquidity will allow for continued compliance with the COVID Plan and public health guidelines so members and employees can remain safe and confident as they return to the debtors’ clubs.”
The company had warned in early September that it had breached covenants under its loan agreements and may be forced to file for bankruptcy “in the near future.” The fitness chain operator also had previously warned of a possible bankruptcy filing in June.
Most of Town Sports clubs are in the Northeast and Mid-Atlantic regions of the U.S. As of December 31, the company operated 186 fitness clubs under various brand names and, collectively, served approximately 605,000 members. It started in New York City in 1973 as a small chain of squash clubs.
The clubs include New York Sports Clubs, with 99 locations; Boston Sports Clubs, 31; Washington Sports Clubs, 9; Philadelphia Sports Clubs, 5; Lucille Roberts, 16; Total Woman Gym and Spa, 11; Palm Beach Sports Clubs, 3; Christi’s Fitness, 1; Around the Clock Fitness, 6; LIV Fitness, 2; New York Sports Clubs, and Switzerland, 3.
Prior to the termination of all non-executive employees, as a result of the club closures in mid-March, 2020, Town Sports employed, in the aggregate, approximately 9,200 employees. Approximately 1,900 worked on a full-time basis.
The filing listed assets and liabilities between $500,000 and $1 billion and creditors between 10,000 to 25,000. Most of the unsecured creditors are gym landlords.
The Top 20 unsecured creditors were:
- ABC Realty, New York, NY, $1,255,433
- TFG Winter Street Property, Boston, MA, $1,107,516
- Babson College, Babson Park, MA, $1,081,644
- 575 Lex Property, Philadelphia, PA, $962,495
- Con Edison, New York, NY, $948,248
- New Roc Parcel 1A, LLC, Fairfield, CT, $945,079
- Garth Organization, New York, NY, $940,659
- Trea, 350 Washington Street LLC, Minneapolis, MN, $935,804
- Related Broadway Development, LLC, New York, NY, $934,504
- Larstrand Corp., New York, NY, $901,870
- Lafayette-Astor Associates LLC, Emerson, NJ, $844,022
- Dobbs Ferry Shopping, New York, NY, $802,289
- Rock Mcgraw, New York, NY, $771,951
- ARE-MA Region No 75, Dallas, TX, $770,926
- Station Landing III, Newton Lower Falls, MA, $747,516
- Inland Diversified Real Estate Services, Chicago, IL, $741,231
- SCF RC Funding IV, Princeton, NJ, $730,018
- Imperial Bag & Paper Company, Jersey City, NJ, $726,621
- 110 BP Property, New York, NY, $715,644
- DC USA Operating Co., New York, NY, $700,013
Photo courtesy Yahoo