United PF Holdings LLC Downgraded To 'CCC+' On Club Closures, Consumer-Driven Recession; Outlook Negative

  • As a result of the coronavirus pandemic, Planet Fitness has closed all of its franchise locations in the U.S., and is temporarily freezing all memberships for the duration of the crisis. While memberships are frozen, United PF Holdings LLC will face a temporary zero or low revenue scenario.
  • Our economists believe a recession in the U.S. in 2020 is likely, and we believe consumer discretionary spending will slow as a result. Softening consumer discretionary spending may result in lowered membership, and consequently lowered revenue and EBITDA.
  • We lowered our issuer credit rating on United PF to 'CCC+' from 'B' with a negative outlook. We also lowered our issue-level ratings on the company's first-lien debt two notches to 'CCC+' from 'B' and its second-lien debt to 'CCC-' from 'CCC+'. The '3' and '6' recovery ratings have not changed.
  • The negative outlook reflects the possibility of significant stress on liquidity as gyms remain closed, and a possibility of a default scenario if containment of the coronavirus takes longer than our estimate of the pandemic will peak between June and August.
NEW YORK (S&P Global Ratings) March 24, 2020--As we announced on March 20, 2020, we lowered our ratings on United PF on March 20, 2020 (see "Various Ratings Actions Taken On 34 Companies In The Lodging And Leisure Sector"). The downgrade reflects our belief that United PF will be unable to bring leverage below our 7x downgrade threshold at the previous 'B' rating. Depending on the depth and longevity of restrictions and closures of out-of-home consumer options, and of the anticipated U.S. recession, the range of outcomes may vary widely for revenue, EBITDA, leverage, and liquidity in coming months and this year. We believe that the potential for club closures lasting through the second quarter of 2020, coupled with high attrition inherent in the fitness club segment will result in significant EBITDA decline, and rapid cash burn, which will be detrimental to liquidity and leverage. It is also possible that membership attrition and lowered revenue may continue past club closures as consumers may view gym memberships as discretionary spending in a recessionary environment, or resist returning to the gym for a prolonged period. We believe these risks are partially offset through Planet Fitness' positioning as a low-cost fitness club operator, which may prove to be a positive credit factor for United PF in a recession, as consumers move down-stream from higher-end fitness clubs to more affordable options.
We believe United PF has been able to nearly completely scale back capital spending on new clubs, and furlough employees to slow cash burn. We also believe the company's cash on hand and revolver will provide liquidity for United PF to survive with no revenue through the second quarter. However, even if existing liquidity proves sufficient to weather a period of club closures, its cash-conservation measures could cause the company to enter into a possible recession with little to no revolver availability, and very little cash on the balance sheet. As a result, the company will be relying on favorable operating conditions to remain solvent in the long run.
Under our current assumption that the pandemic will peak in June or August, and fitness clubs will re-open within a similar timeframe, we anticipate the company can remain solvent. While we expect leverage to remain elevated beyond the pandemic, we do not envision a near-term default scenario under these assumptions. However, we plan to monitor events carefully, and if we believe containment efforts will last beyond our current expected timeframe, we may consider a downgrade of one notch or more.
The negative outlook reflects the possibility of significant anticipated stress on liquidity over the next several months, or possibly longer, that could cause us to downgrade the company if we believe there is a significant risk of a near-term default or distressed exchange.
We plan to monitor events over the coming weeks and months as they unfold, and assess risk to United PF's liquidity position. Given the high degree of uncertainty around when United PF will be able to re-open its clubs, we could lower the rating if we believe the company may run out of liquidity, or we believe that a distressed restructuring is likely.
We may return the outlook to stable if we believe the company has begun to stem significant the cash burn stemming from its club closures. We could raise the rating if we believe that United PF will generate cash flow and EBITDA significant enough to begin material de-leveraging.
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