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.
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."