Rating Action: Moody’s assigns Caa1 CFR to All Day AcquisitionCo, LLC (24 Hour Fitness) following bankruptcy exit; Outlook NegativeGlobal Credit Research – 23 Feb 2021New York, February 23, 2021 — Moody’s Investors Service, (“Moody’s”) assigned new ratings to All Day AcquisitionCo, LLC (dba “24 Hour Fitness”), including a Caa1 Corporate Family Rating (CFR) and Caa1-PD Probability of Default Rating (PDR) in connection with its post-bankruptcy exit financing. Concurrently, Moody’s assigned a B3 rating to the company’s proposed $200 million senior secured term loan due 2026. The outlook is negative.24 Hour Fitness Worldwide, Inc. filed for Chapter 11 bankruptcy on June 15, 2020[1]. On December 30, 2020, the company completed its financial restructuring and emerged from Chapter 11 Bankruptcy proceedings [2]. At emergence, the company reduced its debt relative to the pre-chapter 11 level ($1.4 billion) by about 83% to approximately $240 million. 24 Hour Fitness is issuing exit financing credit facilities comprised of an 18 month $40 million super-priority delayed-draw term loan (unrated; expected to be fully drawn upon close on February 23, 2021) maturing in August 2022 and a $200 million senior secured first lien term loan due 2026.24 Hour Fitness’s post-emergence balance sheet reflects dramatically reduced debt in accordance with the substantial revenue and earnings decline due to the impact from the coronavirus pandemic as well as portfolio rationalization where the company closed about 35% of its clubs (reducing club count from 446 to 286 post chapter 11). The new company now operates about 60% of its clubs in the state of California and about 4% of clubs in the state of Oregon. Gyms in these two states were ordered to re-close in November 2020 due to state mandates given rising coronavirus cases and the timing for re-opening is still uncertain. Moody’s baseline assumption is that California will re-open fitness facilities in April/May. Although Moody’s expects a recovery for the gym sector to start in the later part of 2021 once a higher share of the public has been vaccinated and the coronavirus pandemic subsides, there is still much uncertainty in the timing and extent of an earnings recovery for 24 Hour Fitness given its portfolio concentration in the state of California. Additionally, the company operates in the mid-tier price point segment that has been experiencing intense and challenging competitive pressures from the budget clubs and smaller local clubs in recent years. 24 Hour Fitness was experiencing negative membership trends even prior to the Covid-19 pandemic. Moody’s views there is risk in how the company will attract and retain members in the post pandemic world, especially with the rise of at home fitness technology that is disrupting the fitness industry.Moody’s lease adjusted debt-to-EBITDA leverage is expected to decline to below 6.0x by year end 2021 from a very high level at year end 2020 due to an expected earnings recovery as well as the modest amount of funded debt ($240 million) following the bankruptcy emergence. However, the negative outlook reflects Moody’s view that there is much operational uncertainty over the next year and that a delay in opening of California gyms would create a need for additional capital injections to avoid a restructuring. Specifically, the negative outlook reflects weak liquidity given its approximately $75 million of expected cash following the $40 million delayed draw term loan in February will decline meaningfully over the next few months while the California gyms remain closed for indoor usage. Delayed reopening or slow ramp up in paid membership could deplete the cash by this summer. The company would also need to build cash or refinance the super priority delayed draw term loan balance that is expected to grow to $47 million by the August 2022 due to pay-in-kind interest. However, given the new equity owners are also lenders of the term loan and the delayed draw term loan, the owners could be willing to provide additional cash support depending on the reasons for and amount of such funding need.Moody’s took the following rating actions:Issuer: All Day AcquisitionCo LLCAssignments:…. Corporate Family Rating, assigned Caa1…. Probability of Default Rating, assigned Caa1-PD…. $200 million Senior Secured Term Loan, Assigned B3 (LGD3)Outlook Actions:Issuer: All Day AcquisitionCo LLC…. Outlook, assigned NegativeRATINGS RATIONALE24 Hour Fitness’s Caa1 CFR broadly reflects its weak liquidity over the next 12 to 18 months because of the dependence on a reopening and quick ramp up of paid membership at California gyms within the next few months to avoid a depletion of cash. The expiration of the fully drawn $40 million super priority delayed-draw term loan in August 2022 is also a liquidity weakness. The delayed draw term loan and the senior secured term loan were structured initially to have low cash interest with high pay-in-kind (PIK) interest components to provide the company with more flexibility during the California facility closures. The interest accretion will nevertheless increase the debt burden and refinancing risk. The reliance on the uncertain California recovery and debt with a large PIK component present equity-like risk for creditors. Moody’s lease adjusted debt-to-EBITDA leverage was very high at year end 2020 (over 20.0x pro forma for the debt extinguished in the bankruptcy) but is expected to decline to below 6.0x by year end FY2021 with an earnings recovery. The rating also reflects 24 Hour Fitness’s geographic concentration in California (about 60% of clubs) and the growing competition from technology-based fitness services that are not tied to a facility. Furthermore, the rating is constrained by the highly fragmented and competitive fitness club industry with high attrition rates, 24 Hour Fitness’s positioning in the industry’s more pressured mid-tier price point, as well as exposure to cyclical shifts in discretionary consumer spending. However, the rating is supported by the company’s well-recognized brand name as well as the longer-term positive fundamentals for the fitness industry such as the increased awareness of the importance of health and wellness. The potential for cash support from equity holders, which also own the bulk of the debt, and for rent deferrals if property reopenings or membership ramp up are weaker than anticipated could also provide more time for the company to execute an operational turnaround.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of 24 Hour Fitness from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Specifically, the weaknesses in 24 Hour Fitness’s credit profile, including its exposure to state-by-state efforts such as facility closures to combat the coronavirus, as well as to discretionary consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions. The company remains vulnerable to the ongoing coronavirus pandemic and social distancing measures. Moody’s expects the coronavirus concern for fitness clubs will start to subside in the second half of 2021 once a growing share of the public has been vaccinated, but the timing and strength of any recovery is highly uncertain.Fitness clubs have sensitive customer data including information related to health, workout schedules, and credit cards. Protecting data security is thus important to attracting and retaining customers, and increases operating costs. Rising labor costs are an issue. Demographic and societal trends toward health and wellness are positive social factors supporting demand growth, but growing competition from technology enabled workouts is likely to weaken membership for facilities based fitness providers unless they invest to broaden their service offerings.Governance risk pertaining to the post the chapter 11 reorganization ownership where the company is owned by a group of lenders with top three lenders having the majority control.Moody’s views environmental risks as low, but the company must meet environmental regulations when locating and constructing new clubs.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded should operating performance, credit metrics and liquidity improve. Specifically, a reopening of gyms, renewed membership growth that restores property-level EBITDA closer to pre-pandemic amounts, positive free cash flow, and Moody’s adjusted debt-to-EBITDA sustained below 5.0x along with good liquidity would be necessary for an upgrade.The ratings could be downgraded if the reopening of clubs is delayed more than a few months or the ramp up in paid membership is weaker than anticipated or insufficient to restore positive monthly free cash flow. A further deterioration in liquidity, or increased possibility for a distressed exchange or other default could also lead to a downgrade.The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in San Ramon, California, 24 Hour Fitness Worldwide, Inc. is an operator of fitness centers in the US. Post the chapter 11 bankruptcy, the company operates about 286 clubs predominantly in California. Revenue is expected to be about $520 million in 2020. Post its chapter 11 reorganization, the company is owned by the lender group.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] 24 Hour Fitness Press Release 15-Jun-2020[2] 24 Hour Fitness Investors Relations Press Release 30-Dec-2020Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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