The parent of chains such as New York Sports Club is facing declining membership fees, higher member attrition, an inflexible cost structure, and is feeling the burn from intense competition from the likes of Planet Fitness and others. To make matters worse, the company has a ridiculously large amount of debt, more than it will be able to service, let alone repay when it comes due in a few years.
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I recently published a detailed report laying out the case for how the combination of pressure from all sides will lead to Town Sports International's inevitable restructuring, either out of court or via bankruptcy.
Below is a follow-up to that report with some new information and analysis from the credit side of things. This is, after all, a super-levered company, so equity investors need to pay attention.
Here are three highlights from the report:
1. Our original report cited industry publication S&P Leveraged Commentary & Data Distressed Weekly letters, which said that Town Sports International had hired financial or restructuring advisers. LCD has since said that it reported that news in error. However, we reiterate "our belief that the company will (and should) do so by year-end 2016 as management-led turnaround efforts fail to achieve desired results."
2. On Tuesday, Moody's downgraded Town Sports International's revolver and term-loan facilities, downgraded the company's probability of default rating and left the speculative-grade liquidity unchanged. Moody's analysis is similar to ours, as are its conclusions.
According to our report: "Our analysis suggests the company can support maybe one-third [of] its current debt burden after closing/selling a significant number of locations. CLUB debt has recently traded in the 30s, which represents a not-unattractive buying opportunity. As such, we expect the creditor roster to continue to shift away from [accommodating] lenders towards distressed, dare we say, vulture-like investors."
As the financial situation gets worse at the company, lenders might be more likely to force actions that could even include a bankruptcy proceeding.
3. We reiterate our belief that the company's equity is "worth zero." Anyone thinking of shorting the stock should remember the adage "markets can stay irrational longer than you can stay solvent."
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
The opinions presented herein are solely those of Stone Street Advisors LLC. Neither Stone Street Advisors LLC nor any of its members has a position in CLUB or CLUB derivatives, nor any plans to initiate a position. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Stone Street Advisors LLC makes no representation or warranty as to the accuracy, completeness or timeliness of the information contained herein, and disclaims all liability arising from errors or omissions contained in this presentation. This document is presented for informational purposes only and does not constitute investment advice. Stone Street Advisors LLC is not an Investment Advisor.