Mon 06/15/2020 15:15 PM
Relevant Documents:Voluntary PetitionFirst Day DeclarationDIP Financing MotionPress Release24 Hour Fitness Worldwide
, a San Ramon, Calif.-based operator of health and fitness clubs, and several affiliates filed petitions for chapter 11 today in the Bankruptcy Court for the District of Delaware. The debtors have about $1.4 billion in funded debt as of the petition date, in addition to “substantial rental expense” associated with the debtors’ “club fleet.” The company largely attributes its filing to the “disproportionate impact” of the Covid-19 pandemic, which forced the debtors to “hibernate” their operations and suspend their membership revenue on April 15. The debtors state that they “have not generated any material operating revenues for nearly two months” and do not expect to generate “any material cash flow.”
According to the first day declaration of FTI’s Daniel Hugo, the debtors’ CRO, an ad hoc group holding approximately 63.3% of the aggregate principal amount outstanding under the prepetition credit facility and approximately 73.9% of the face amount of the debtors’ senior unsecured notes have agreed to fully backstop a $250 million new-money DIP facility.
The debtors are seeking authority to access $50 million in DIP financing on an interim basis. The DIP financing also contemplates a $250 million rollup
of amounts due under the prepetition credit facility.
Hugo notes that the debtors have “engaged in productive discussions with the Ad Hoc Group around a holistic reorganization, and the Debtors expect these discussions will continue postpetition, with the goal of building consensus around a deleveraging transaction and filing a plan of reorganization in the near term.” To that end, the debtors’ DIP financing contains a milestone requiring the debtors to enter into a restructuring support agreement with a majority of DIP lenders and a majority of prepetition loans within 55 days of the petition date.
The first day declaration states that the debtors have entered chapter 11 with less than $9 million of cash on hand. As of the petition date, Hugo says, the debtors have reopened 20 of their fitness clubs in Texas and “intend to continue” with a “measured reopening” with the goal of reopening the majority of their clubs by the end of June. The debtors have implemented a number of strategies to ensure the clubs remain in compliance with all applicable “social-distancing” guidelines, including an app-based reservation system and hourly sanitization of clubs. The debtors currently face a lawsuit related to the rights under membership agreements and the company’s monthly billing on a post-March 16 basis, the declaration adds.
As of March 31, the debtors served approximately 3.4 million members in 445 locations across the United States, all of which are leased. The debtors, with the assistance of Hilco Real Estate, “have already begun negotiations with their landlords to facilitate the cost savings necessary to rightsize their go-forward club footprint” and are seeking authority to reject about 135 leases as part of their first day relief. The first day declaration notes that the debtors “intend [to] request” authority to suspend certain payments to landlords on account of prepetition real property lease obligations.
Hugo also notes that as part of the debtors’ restructuring efforts, they have commenced a process to engage with potential strategic and financial investors to determine whether parties outside of the capital structure could provide a value-maximizing alternative
. The debtors’ restructuring efforts are being overseen by a special committee, Hugo adds.
Weil Gotshal and Pachulski Stang Ziehl & Jones are serving as the debtors’ legal counsel, FTI has been retained as financial advisor, Lazard is serving as investment banker, and Prime Clerk is the debtors' claims and noticing agent. The debtors have also been working with Hilco Real Estate. O’Melveny & Myers and Richards, Layton are counsel to the ad hoc group, and PJT Partners LP is financial advisor to the ad hoc group.
The case has been assigned to Judge Karen B. Owens (case No. 20-11558). The first day hearing has not been scheduled as of the time of publication.
The company’s capital structure is reported in the first day declaration as follows:
According to the first day declaration, 24 Holdings II is indirectly owned by affiliates of AEA Investors, Ontario Teachers’ Pension Plan and Fitness Capital Partners, with AEA holding 42.7%, Fitness Capital holding 31.2% and Ontario Teachers’ Pension Plan holding 22.8% of equity.
In addition to the impact of Covid-19, the debtors also faced operational challenges related to their pilot program known as the “‘Evolutionary Model’” or EVO, which was intended as a cost-saving measure that “ultimately impaired [the debtors’] ability to convert potential members into actual dues-paying members.” After an executive team overhaul in 2019, which sought to “mend” the gaps in the EVO, the first day declaration says, the debtors began to “realize positive developments” that were “stopped … in their tracks” by Covid-19.Background
24 Hour Fitness is one of the nation’s leading operators of health and fitness clubs operating out of its two headquarters locations in San Ramon, Calif., and Carlsbad, Calif. Prior to the March closure as a result of the Covid-19 pandemic, the debtors operated in 14 states and the District of Columbia, with 445 clubs serving approximately 3.4 million members. The debtors generate revenue primarily through various club membership fees and the sale of related goods and services such as fitness apparel, food and beverage concessions, and personal training sessions. In 2019, 24 Hour Fitness generated revenue of $1.5 billion and adjusted EBITDA of $191 million.
24 Hour Fitness was founded in 1983 with a single fitness club in San Leandro, Calif., operating under the name Nautilus Health Spa. After expansion and a rebranding to 24 Hour Fitness, the debtors operated more than 100 clubs in six states by 1996. A series of subsequent acquisitions helped the debtors expand to serve more than 3 million members and reach $1 billion in annual revenue by 2002. The debtors continued expansion thereafter, acquiring an additional 32 clubs from Bally Total Fitness Holding Corp. and operating select club locations under the BFit brand.
However, the company cites a number of operational missteps in prior years that hampered financial performance. In particular, the debtors established the evolutionary model, or EVO, to enhance their sales model and transitioned this model into all clubs by July 2019. A review by a largely new executive management team brought on in early 2019 concluded that the EVO model ultimately impaired the debtors’ ability to convert potential members into actual dues-paying members, and as a result, they implemented new strategic measures, which were abruptly disrupted by Covid-19.
Because of the closure of their clubs in March 2020, the debtors furloughed approximately 17,800 individuals (out of 19,200) and reduced their workforce by approximately 700 individuals. After evaluating their go-forward club footprint and implementing certain strategic initiatives, the debtors further reduced their workforce by approximately 8,300 individuals prior to commencing these chapter 11 cases, such that they employ approximately 10,200 individuals as of the petition date, including approximately 8,100 individuals who are employed on a part-time basis.
The debtors closed all club locations on March 16 and suspended monthly membership revenue on or about April 15, notwithstanding the temporary closure provisions set forth in the debtors’ various membership agreements. As a result, the debtors have not generated any material operating revenue for nearly two months.
In early 2020, the debtors engaged in preliminary discussions with certain creditors around potential balance sheet transactions and proactively engaged with, among other stakeholders, members of the ad hoc group after the onset of the pandemic. The debtors negotiated a forbearance through June 18 in connection with their failure to deliver certain financial statements required under their prepetition credit facility, and they elected to utilize the 30-day grace period arising from their skipped June 1 interest payment on their senior unsecured notes.
With less than $9 million of cash on hand and the reopening process in the early stages, the debtors are using the chapter 11 process to enhance liquidity and right-size their footprint and balance sheet. The debtors, with the assistance of Hilco Real Estate LLC, have already begun negotiations with their landlords to facilitate the cost savings necessary to right-size their go-forward club footprint, and they say they further expect to exit certain clubs during these chapter 11 cases.
An organizational chart is shown below:
The debtors' largest unsecured creditors are listed below:
|10 Largest Unsecured Creditors
|Veritas Media Group LLC
|Raymond Construction Inc
|DGC Capital Contracting
||Mount Vernon, N.Y.
|Club Resource Group Inc
|AT Kearney Inc
|Muscle Foods USA
|Epsilon Agency LLC
The case representatives are as follows:
||Ray C. Schrock
Ryan Preston Dahl
Kyle R. Satterfield
||Laura Davis Jones
Timothy P. Cairns
Peter J. Keane
|Debtors' Financial Advisor
||Daniel Hugo (CRO)
|Debtors' Investment Banker
|Co-Counsel to the
Ad Hoc Group and
Daniel S. Shamah
John J. Rapisardi
|Co-Counsel to the
Ad Hoc Group
|Financial Advisor to the
Ad Hoc Group
|Counsel to the
First Lien Agent
Richard A. Levy
|Counsel to the DIP Agent
|United States Trustee
||Linda J. Casey
||Office of the
|Debtors' Claims Agent
||Benjamin J. Steele
DIP Financing Motion
The debtors have obtained a fully backstopped $250 million new-money DIP financing package from certain of their prepetition lenders and noteholders. The debtors are seeking authorization to access $50 million in financing on an interim basis and $200 million on a final basis. The DIP also contains a $250 million rollup of debt under the prepetition secured credit facility. Wilmington Trust NA is the DIP agent.
The DIP financing motion states that each lender under the debtors’ prepetition credit facility is eligible to subscribe for its ratable share of the new-money DIP facility by subscribing on or within three business days from entry of the interim DIP order. “The New Money DIP Facility, in turn, is fully backstopped by certain of the Debtors’ prepetition secured creditors pursuant to the Backstop Commitment Letter,” the motion says.
The DIP financing bears interest at L+1,000 bps (with a 1% floor) or base rate plus 900 bps (with 1% floor), at the debtors’ discretion, with 2% for the default rate, and matures on the earlier of (i) 12 months from the closing date, (ii) the consummation of a sale of substantially all assets, (iii) the consummation date of a plan of reorganization and (iv) the date of acceleration of the loans and termination of the commitments under section 8 of the credit agreement.
To secure the DIP financing, subject to the carve-out, the debtors propose to grant first priority liens on all DIP collateral that was unencumbered as of the petition date, junior liens on collateral encumbered by non-avoidable liens and senior liens with respect to the prepetition credit facility liens and adequate protection liens. The debtors would also grant a superpriority administrative expense claim on account of the DIP.
The DIP contains reporting and variance covenants that require the debtors to explain any variance in actual receipts and disbursements compared with the DIP budget.
In exchange for the backstop, the debtors have agreed to pay certain fees on the new-money portion of the DIP, including a 6% backstop commitment fee, which is to be paid in kind, and a 4% upfront equity investment right payable in reorganized common equity issued through a plan of reorganization (unless an alternative transaction is consummated).
The DIP also contemplates the following fees, which would be paid to all DIP lenders, including the backstop parties: a 3% commitment fee payable in cash upon the initial borrowing and subsequent borrowing and a 4% “Alternative Transaction Payment” payable in cash upon the sale of all or substantially all of the debtors’ assets.
In support of the proposed DIP financing, the debtors filed the declaration
of Tyler Cowan, a managing director at Lazard, who states that on the basis of the debtors’ limited ability to generate cash flow in the near term, plus the impact of Covid-19 and the associated restrictions on the debtors’ operations, the debtors require on an immediate basis “substantial incremental financing together with access to Cash Collateral, to operate their business, re-open their club locations, and to maintain sufficient liquidity cushion during the pendency of the Chapter 11 Cases.”
Cowan states that he does not believe that the debtors have a sufficient liquidity cushion to operate their businesses solely by using cash collateral in light of the expected demands that are reasonably likely to arise after the commencement of the chapter 11 cases, including the administrative expenses of administering the chapter 11 cases, together with the material incremental costs required to reopen the debtors’ club operations. Further, he says that the debtors are projected to generate less than $2 million of receipts over the first four weeks of the cases.Adequate Protection
The company proposes the following adequate protection to its prepetition secured parties subject to the carve-out, the DIP liens and the liens senior to the DIP liens: replacement liens, payment of fees and expenses of professionals (excluding success or transaction fees) and allowed superpriority administrative expense claims. The adequate protection claims would not have recourse against “Excluded Assets” and would have recourse against avoidance action proceeds only upon entry of a final order.
In addition, the debtors propose, subject to entry of the final order, a waiver of the debtors’ right to assert (i) any claims to surcharge against the DIP collateral pursuant to section 506(c) of the Bankruptcy Code, (ii) any “equities of the case” claims under section 552(b) of the Bankruptcy Code, and (iii) the equitable doctrine of “marshaling” or any similar doctrine with respect to the DIP collateral.
The carve-out for professional fees is $5 million.
There is a 75-day challenge period from entry of the interim DIP order or, if an official committee of unsecured creditors is appointed, 60 days from the date of formation.DIP Budget
The proposed budget for the use of the DIP facility is below.
The DIP financing is subject to the following milestones:
- June 18: Entry of the interim DIP order;
- July 25: Entry of the final DIP order;
- Aug. 9: Entry into an RSA between the debtors and holders of a majority of DIP loan and existing credit facility loans provided that it is agreed any such RSA will have a “fiduciary out” consistent with a precedent RSA previously identified as between the parties and will not impose a “no shop” or similar restriction on the debtors;
- Aug. 14: Filing of chapter 11 plan consistent with RSA;
- Oct. 8: Entry of order approving disclosure statement;
- Nov. 22: Entry of order confirming plan; and
- Dec. 12: Plan effective date.
The debtors also filed various standard first day motions, including the following:
- Motion for Joint Administration
- The cases will be jointly administered under case No. 20-11558.
- Motion to Establish Trading Procedures
- The company seeks to establish trading procedures for its common stock, to be able to object to and prevent transfers if necessary to preserve net operating losses. The debtors have about $447 million in NOLs, carryforwards of disallowed business interest expense of approximately $92 million and estimated carryforwards of unused general business credits of approximately $9 million. The debtors note that a prior change of ownership limitation from 2014 may apply to a portion of the NOLs.
- Motion to Pay Critical Trade Vendors
- The debtors seek authority to pay prepetition amounts owed to critical vendors in an amount not to exceed $8.7 million on an interim basis and $14.5 million on a final basis.
- Motion to Pay Prepetition Claims of 503(b)(9) Claimants
- The debtors seek to pay certain prepetition claims held by shippers and warehousemen in an amount not to exceed $1.8 million and claims of non-merchant lienholders in an amount not to exceed $11.7 million. The debtors also seek to pay certain 503(b)(9) claims in an amount not to exceed $500,000.
- Motion to Pay Employee Wages and Benefits
- The debtors seek to continue a compensation and benefits program for their employees. As of petition date, the debtors estimate they owe $9.5 million on the program, $6.9 million of which will come due during the interim period.
- Motion to Use Cash Management System
- The company has bank accounts with Wells Fargo, the Bank of Hawaii and an investment account with Fidelity. Twenty-two accounts are held by 24 Hour Fitness USA Inc., six accounts are held by RS Fit Holdings LLC, and two accounts are held by 24 Hour Fitness Worldwide Inc. The bank accounts held by 24 Hour USA are used to facilitate the movement of all other funds generated by the debtors’ business. As of the petition date, the debtors have an aggregate of $8.4 million in the bank accounts. The majority of these funds - $7.8 million - are held in the Fidelity investment account.
- Motion to Maintain Insurance Programs
- The debtors seek to pay insurance premiums as they come due. The debtors pay about $11.4 million in insurance premiums each year. About $3.2 million in insurance premiums will become due and payable during the interim period, and approximately $1.4 million of insurance premiums will become due and owing thereafter.
- Motion to Pay Taxes and Fees
- Motion to Provide Utilities with Adequate Assurance
- The debtors note they intend to pay all postpetition obligations owed to utility providers in a timely manner and seek to deposit $1.8 million into an adequate assurance account for the benefit of the utility providers.
- Motion to Continue Customer Programs
- Lease Rejection Procedures Motion / Motion to Reject Certain Unexpired Leases
- Application to Appoint Prime Clerk as Claims Agent