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Rating Action:

Moody's affirms Patchell Holdings Inc.'s B3 CFR

21 Feb 2023

Toronto, February 21, 2023 -- Moody's Investors Service (Moody's) affirmed Patchell Holdings Inc.'s (PHI) B3 corporate family rating (CFR), B3-PD probability of default rating, and B2 rating on the senior secured first-lien debt issued at PHI's subsidiary GoodLife Fitness Centres Inc. The outlook remains stable.

The ratings affirmation reflects Moody's expectation that the company will continue to improve its operating performance while recovering from Covid as memberships increase and the benefits of price increases are realized. The higher interest rate environment and the uncertainty in the pace and scale of membership growth post COVID continues to exist and could cause cash flow and liquidity to be weaker than Moody's expectation. However, if needed, the company can adjust capex, has access to a C$75 million Delayed Draw Term Loan until October 2023, and could also establish an up to C$100 million super senior revolving facility by October 2023 to support its liquidity, as permitted under its existing credit agreement.

Affirmations:

..Issuer: Patchell Holdings Inc.

.... Corporate Family Rating, Affirmed B3

.... Probability of Default Rating, Affirmed B3-PD

..Issuer: Goodlife Fitness Centres Inc.

.... Backed Senior Secured 1st Lien Bank Credit Facility, Affirmed B2 (LGD3)

Outlook Actions:

..Issuer: Patchell Holdings Inc.

....Outlook, Remains Stable

..Issuer: Goodlife Fitness Centres Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

Patchell Holdings Inc.'s B3 CFR is constrained by: 1) Moody's expectation of weak but improving coverage and leverage metrics in 2023 and 2024; 2) uncertainty around the pace and scale of recovery in revenue and earnings after membership declined materially as a result of the Coronavirus pandemic; and 3) fitness industry business risks as a result of exposure to shifts in consumer spending habits, competition from at home workout products and high membership attrition rates. The company is supported by: 1) its strong position as the premier fitness club operator in Canada, with over 360 clubs located across Canada under its GoodLife, Fit4Less and Econofitness banners, that will support its recovery; 2) our expectation that pent up demand and a greater focus on physical health will drive revenue and EBITDA growth; and 3) adequate liquidity profile.

PHI has adequate liquidity over the next four quarters. The company had cash of around C$76 million at December 2022, which Moody's expects will be just enough to cover the cash burn. Moody's expects PHI will generate negative free cash flow of around C$60 million over the next four quarters through December 2023, driven by higher interest expense and capex spending (can be adjusted). The company does have access to a C$75 million delayed draw term loan (available to draw until October 2023) that it could use to bolster liquidity. PHI also has the ability to establish up to C$100 million super senior revolving facility until October 2023 under its existing agreements. The company is subject to a net first lien leverage covenant that steps down quarterly starting the quarter ending December 2022. Moody's expects that PHI will be in compliance with its covenants when tested.

The C$625 million first-lien term loan facility and C$75 million delayed draw term loan (both due in October 2026) are rated B2, one notch higher than the B3 CFR. The one notch differential is driven by the first lien facilities' effective priority over unsecured obligations, mainly consisting of operating lease commitments.

The stable outlook reflects Moody's expectation that PHI's credit metrics will improve over the next 12-18 months driven by recovering revenue and earnings, and that it will maintain adequate liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if the company's revenue and EBITDA improve, its leverage declines below 6x on a Moody's adjusted basis (over 7x expected in 2023), and the company's liquidity profile improves as a result of sustained positive free cash flow generation.

The ratings could be downgraded if the company's revenue and EBITDA declined, leverage is sustained above 7.5x, EBITDA/interest trends towards 1x, inability to establish a committed revolving facility of adequate size and duration, or if the company's liquidity profile deteriorated as a result of sustained negative free cash flow.

Patchell Holdings Inc. is the parent company of Goodlife Fitness Centres Inc., the premier operator of fitness clubs (gyms) in Canada, with locations in every province. The company is headquartered in London, Ontario. The company has several banners, including its full-service GoodLife clubs, its high value low cost (HVLC) Fit4Less offerings, and Econofitness clubs in Quebec. Patchell Holdings Inc. is the guarantor of the debt issued at GoodLife Fitness Centres Inc.

The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.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://ratings.moodys.com/documents/PBC_1288235.

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 https://ratings.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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Mikhil Mahore
Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Paresh Chari
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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