If the BDC Credit Reporter had waited just a few minutes more, we could have incorporated our last news item about 24 Hour Fitness Worldwide closing down a quarter of its locations for ever into the much bigger news of the day: the company’s Chapter 11 filing, just announced on Bloomberg. Obviously this was no surprise to anyone. What we learned today (Monday June 15, 2020) is that the company and its $1.4bn in debt was not able to agree a restructuring plan before filing for protection. We also learned that $250mn in Debtor In Possession financing has been agreed on, as the gym chain seeks to re-open many locations and operate as normally as Covid-19 allows.
We have downgraded the company from CCR 4 to CCR 5, i.e. non performing. Furthermore, the bankruptcy filing removes 24 Hour Fitness from the Weakest Links list now our projection has come true. For the only BDC with exposure – Barings BDC (BBDC) – this officially means no income is being generated on the LIBOR + 350 2025 Term Loan, a loss of under ($0.2mn) per annum. The value of the debt has already been written down by (80%) to under $1mn. For the BDC Credit Reporter, running from pillar to post with many other troubled names, the amounts now involved make this a Non Material investment so expect less coverage in the future.
This is the fifth BDC-financed company to file for bankruptcy protection in June. For BBDC this is a reverse for a loan booked in the IIIQ 2018 that must have seemed very “safe” given the pricing at the time. However, contrary to what management says, the troubles at 24 Hour Fitness predated Covid-19 . Over-building in the gym space; technological changes (“Peloton”) and the drag of high leverage had already caused BBDC to write down the debt by (25%) in the IVQ 2019. As a result, 24 Hour Fitness falls into our “first wave” of credit defaults – already weakened businesses given a knock out punch by the impact of the virus. Unfortunately that’s a reminder that we’re still at the beginning of a potential three waves of bankruptcies. Many more companies seem to be headed this way.