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Rating Action:

Moody's assigns Caa3 to Life Time's proposed $475 million senior unsecured notes

28 Jan 2021

New York, January 28, 2021 -- Moody's Investors Service ("Moody's") assigned Caa3 to Life Time, Inc.'s ("Life Time") proposed $475 million senior unsecured notes due 2026 that will be used to fund the refinancing of the company's existing $450 million senior unsecured notes. Life Time's existing ratings including the Caa1 Corporate Family Rating and stable outlook are not affected.

The refinancing of its senior unsecured notes extends the unsecured maturity profile from 2023 to 2026, which Moody's views as credit positive. With the successful completion of this transaction, Life Time will have no meaningful maturities until its revolver expires in September 2024. Life Time's existing ratings are not affected because debt, leverage, cash interest expense and liquidity are not changing materially.

Moody's took the following rating actions:

Issuer: Life Time, Inc.

Assignments:

…Proposed Senior Unsecured Notes, assigned Caa3 (LGD6)

Moody's expects to withdraw the Caa3 rating on the existing $450 million senior unsecured notes due 2023 once the proposed transaction closes.

RATINGS RATIONALE

Life Time's Caa1 CFR reflects its very high leverage with Moody's adjusted debt-to-EBITDA expected to remain above 10x over the next year as the result of significant earnings declines due to reductions in membership and facility utilization from the coronavirus pandemic in the US. The rating is constrained by the company's aggressive growth policy and historically high reliance on external financing to support its new club openings including sale-leaseback transactions, landlord incentives and revolver borrowings. The rating also reflects Life Time's moderate geographic concentration and the business risks associated with the highly fragmented and competitive fitness club industry, which includes high membership attrition rates and exposure to shifts in consumer spending and economic cycles.

Life Time's credit profile benefits from its focus on a more affluent member base and expanded service offerings relative to most fitness clubs that make it less susceptible to increasing competition from the value priced fitness clubs. The larger sized and country club like facilities with outdoor amenities such as pools and tennis courts will continue to enable Life Time to fare better during the coronavirus pandemic and subsequent recovery versus its peers with only indoor gyms. The rating is also supported by the company's solid asset base from owning about 42% of its clubs, of which 29 are pledged to the first lien bank credit facilities. Monetization of real estate provides an additional option to bolster liquidity if needed, and distinguishes Life Time from most other fitness clubs where facilities are primarily leased. The company was able to access the sale leaseback market even during the worst period of the pandemic in 2020, which attests to the value of its real estate assets.

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 Life Time 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 Life Time's credit profile, including its exposure to discretionary consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the ongoing coronavirus pandemic and social distancing measures. Moody's expect 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.

Governance concerns come from the fact that Life Time is owned by a group of private investors including large private equity firms. Financial policy has been aggressive in the past with regards to using high leverage and external financing to fund growth capital expenditure. However, the owners have been supportive of the company when needed in the past including cash injections via loans in mid-2020 to bolster liquidity and reinvestment (sponsor loan was converted into preferred equity in early 2021), and we expect owners to continue to be supportive with equity injections if necessary.

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 oriented workouts is likely to weaken membership for facilities based fitness providers unless they invest to broaden their service offerings.

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

The stable outlook reflects Moody's view that Life Time will have adequate liquidity including an approximate $200 million cash balance and no meaningful maturities until the revolver expires in 2024 following recent refinancing activity and waiver of its springing covenant through March 31, 2022. The stable outlook also incorporates Moody's expectation that Life Time's owners will continue to support the company with equity injections in 2021 to fund operations and growth capital as needed and that the company could generate proceeds from sale-lease back transactions to help fund its operations over the next year. The existing liquidity and additional capital sources should help Life Time manage in a weak economic environment for fitness clubs where the company remains vulnerable to coronavirus disruptions and unfavorable shifts in discretionary consumer spending.

Ratings could be upgraded should operating performance, credit metrics and liquidity improve. Specifically, renewed membership and EBITDA growth, positive free cash flow before growth investments, Moody's adjusted debt-to-EBITDA sustained below 7.5x along with good liquidity would be necessary for an upgrade.

The ratings could be downgraded if there is further deterioration of membership levels, operating performance, credit metrics or liquidity. Furthermore, ratings could be downgraded should the prospect of a distressed exchange or other default increases, or if recovery prospects weaken.

The principal methodology used in this rating 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 Chanhassen, MN, Life Time, Inc. operates 149 large format fitness clubs in 29 states and one Canadian province mostly in suburban locations. LTM revenue as of September 30, 2020 was about $1.2 billion. The company is owned by a group of private investors.

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 ratings tab on the issuer/entity page for the respective issuer on www.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 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.

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.

Please 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.

Joanna O'Brien
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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