New York Sports Clubs Owner Mulls Bankruptcy While Gyms Shut (1)

April 14, 2020, 6:30 PM

The owner of the New York Sports Clubs chain is considering a bankruptcy filing as gyms across the country remain closed to stop the spread of coronavirus.

Town Sports International Holdings Inc. has been in talks with advisers and lenders to get ahead of its nearly $200 million loan maturity in November, according to people with knowledge of the matter. It’s weighing a Chapter 11 filing as it seeks financial support from creditors, but the talks could also result in an out-of-court solution, the people said. The company’s shares, which were already trading for less than 50 cents, tumbled another 21% on Tuesday.

Even before the virus shuttered the global economy, a number of gym chains were struggling with onerous debt loads. With no certainty on when they’ll be able to reopen or whether they’ll have access to additional government aid, those troubles have been exacerbated.

Town Sports is getting advice from lawyers at Olshan Frome Wolosky LLP and interviewing investment bankers to serve as the company’s financial adviser, the people said. A group of lenders is working with law firm Gibson Dunn & Crutcher LLP and restructuring specialists at FTI Consulting Inc., the people said, asking not to be identified discussing a private matter.

Representatives for New York-based Town Sports, Olshan, Gibson and FTI didn’t immediately respond to messages seeking comment.

Virus Variable

The situation remains fluid and plans could change, the people said. Variables include the duration of the shutdown, with revenue suffering across the fitness industry because of the pandemic.

Another weakness came in the company’s annual report, which warned last month that there’s substantial doubt about its survival. Inclusion of the “going concern” statement counts as an event of default on the company’s term loan facility, which means lenders can call the debt before its maturity, according to the filing.

Town Sports, which operates the New York, Boston, Philadelphia and Washington Sports Clubs, was looking for a financial reprieve through a deal to buy the indoor cycling studio business of Flywheel Sports, owned by Kennedy Lewis Investment Management LLC.

The chain, with 600,000 members, wanted to use part of the financing from Flywheel’s owners to replace a loan coming due in November. But plans fell apart and the two parties dropped the agreement. The Town Sports loan has been trading for around 37 cents on the dollar.

Sales Outlook

Before the company was forced to shut its doors, Town Sports reported a sales increase of around 1% for the months of January and February. “As we weather the strains on our business from the unprecedented worldwide response to the coronavirus outbreak, we look forward to resuming this trend in the remainder of 2020,” Chief Executive Officer Patrick Walsh said in the fourth-quarter earnings statement.

In the meantime, Town Sports is entangled in customer lawsuits because it continued charging members during the shutdown and allegedly made it hard for them to cancel.

It’s uncertain when the clubs will re-open and the company is “likely to experience reduced customer demand, a significant increase in membership terminations and may be unable to recover these members or generate new ones,” according to last month’s filing.

Town Sports borrowed $12.5 million from its revolving credit facility after it was forced to close 95% of its clubs. The company reported around $178 million of debt outstanding under its term loan as of year-end, according to the report, and acknowledged cash wasn’t sufficient to cover its November obligation.

Shares of the company fell 10 cents to 38 cents as of 2:29 p.m. in New York.

New York Sports Clubs began operations as a cluster of squash clubs in the 1970s before introducing exercise classes and expanding up and down the U.S. East Coast. The company operates about 200 fitness studios, with a majority in the New York metro area.

(Adds share price in second, penultimate paragraphs.)

To contact the reporters on this story:
Katherine Doherty in New York at kdoherty23@bloomberg.net;
Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editors responsible for this story:
Rick Green at rgreen18@bloomberg.net

Shannon D. Harrington

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

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