Equinox Holdings, Inc. -- Moody's rates Equinox's proposed bank debt; B3 CFR affirmed; outlook to positive
New York, November 09, 2012 -- Moody's Investors Service affirmed Equinox Holdings, Inc.'s ("Equinox") B3 corporate family rating and B3 probability of default rating. Moody's also assigned B1 ratings to the company's proposed first lien senior secured credit facilities, consisting of a $100 million revolving credit facility due 2017 and a $500 million term loan due 2019. Moody's assigned a Caa2 rating to the proposed $200 million second lien senior secured term loan due 2020. The ratings outlook was changed to positive from stable.
Proceeds from the proposed bank debt will be used to refinance existing debt, included the $425 million senior secured notes and the holding company PIK notes.
The ratings affirmation reflects Moody's view that the proposed refinancing does not materially change the company's credit profile. Moody's favorably views the financing to the extent it extends debt maturities, increases the size of the revolving credit facility, and lowers interest expense. The financing, however, is a modest credit negative in that Equinox will transfer $40 million of its cash to Blink Holdings, Inc. and Juice Creations LLC, which will be designated as unrestricted subsidiaries. This transfer of cash combined with other transaction-related expenses will reduce the restricted group's cash balance to approximately $20 million from over $80 million as of September 30, 2012. Notwithstanding this reduction in cash, Moody's still expects Equinox to maintain a good pro forma liquidity profile over the next twelve months due to expectations for breakeven free cash flow (including discretionary capital spending), significant capacity under its revolving credit facility, and ample cushion under its proposed financial covenants.
The rating also reflects Moody's expectation that leverage will decline to or below 6.0 times over the next 12 to 18 months based on sustained positive comparable club revenues and the maturation of new clubs. Strong EBITDA growth is critical for deleveraging since the bulk of cash flow will be used for discretionary capital spending.
The outlook revision reflects Equinox's distinct market position as a high-end fitness club operator and Moody's expectation that it will sustain strong organic growth trends such that leverage continues to improve from initial pro forma levels. The outlook also reflects Moody's expectation that the company will refrain from material debt-financed acquisitions near-term and that capital spending will be within expectations.
Corporate family rating at B3
Probability of default rating at B3
Proposed $100 million first lien senior secured revolving credit facility due 2017 at B1 (LGD3, 31%)
Proposed $500 million first lien senior secured term loan due 2019 at B1 (LGD3, 31%)
Proposed $200 million second lien senior secured term loan due 2020 at Caa2 (LGD5, 82%)
Rating affirmed and to be withdrawn:
$425 million senior secured notes due 2016 at B1 (LGD3, 31%)
Equinox's B3 corporate family rating is principally constrained by its high pro forma leverage, weak interest coverage, and modest free cash flow due to significant discretionary capital spending. The rating also reflects high geographic concentration with almost 50% of revenue derived from fitness clubs located in the New York market. However, the rating is supported by the company's solid comparable club revenues, favorable long-term growth fundamentals for the fitness industry, upside from the maturation of clubs, and Moody's expectation that revenue and profitability will continue to improve.
The ratings could be upgraded if Equinox is able to sustain positive comparable-club revenues, continue to execute on its expansion strategy, and improve profitability such that debt to EBITDA is sustained below 6.0 times and EBITDA less maintenance capex to interest exceeds 1.5 times.
Moody's could change the outlook to stable if Equinox is unable to reduce leverage below 6.5 times near-term. Equinox's ratings could be pressured if its revenue and earnings growth are weaker than expected such that financial leverage is sustained above 7.0 times and EBITDA less maintenance capex to interest is below 1.0 times. A material weakening of the company's liquidity profile could also pressure the ratings.
Additional information can be found in the Equinox Credit Opinion published on Moodys.com.
The principal methodology used in rating Equinox Holdings was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in New York, Equinox Holdings, Inc. is an operator of high-end full-service fitness clubs that offer an integrated selection of Equinox-branded programs, services and products. Revenues were $506 million for the twelve month period ended June 30, 2012.
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Daniel Marx Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Alexandra S. Parker MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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