On November 12, 2019, Moody’s downgraded 24 Hour Fitness Worldwide,Inc. to a corporate family rating of Caa1 from B2. There were a series of downgrades as well of individual debt tranches on the company’s balance sheet, from secured to unsecured debt and involving $1.5bn of debt securities. We won’t get into too much detail about the reasons for the downgrade, which relate to business under-performance. This sentence from the Moody’s report speaks volumes by itself: “The Caa1 CFR reflects Moody’s forecasts that 24 Hour Fitness’ EBITDA will decline further resulting in funded debt/EBITDA (excluding operating leases) peaking at 8.2x while EBITA/interest expense (excluding operating leases) will erode to 0.3x“.
That adds a new company to the BDC Credit Reporter’s list of under-performing companies. However, exposure is thankfully limited to one BDC – Barings BDC (BBDC) with a $9.5mn at cost in the company’s 2025 debt. That was booked in the IIIQ 2018 before these current weaknesses became apparent (BBDC may have paid a premium for a loan that pays LIBOR + 350 bps) and was still valued at only a (4%) discount to cost as of September 2019.
This same debt appears to be currently trading – after the downgrade and after an unproductive investor meeting – at a substantial discount. We have rated 24 Hour Fitness right off the bat CCR 4 (Worry List) from CCR 2 (Performing). To be direct, given the level of debt versus EBITDA and the nature of the business, which is unlikely to see a surge in growth at this stage in its development, we expect to see a Chapter 11 or major restructuring occur. The company has no immediate liquidity pressure and no debt due till 2022, so there is unlikely to be a sudden rush to the courthouse steps. On the other hand, an operational improvement sufficient to change the outlook is highly unlikely. We imagine that we’ll be revistting this subject in the months ahead.