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Rating Action:

Moody's changes Town Sports outlook to stable; affirms Caa2 CFR; upgrades bank debt rating to Caa1

08 May 2017

Approximately $246 million of rated debt instruments affected

New York, May 08, 2017 -- Moody's Investors Service changed the ratings outlook for the debt of Town Sports International Holdings, Inc. ("Town Sports") to stable from negative. At the same time, Moody's affirmed the company's Corporate Family Rating (CFR) and Probability of Default Rating (PDR) at Caa2 and Caa2-PD, respectively, and its Speculative Grade Liquidity Rating at SGL-3, while also upgrading the company's senior secured credit facilities rating to Caa1 from Caa2. Town Sports' Speculative Grade Liquidity Rating is SGL-3.

According to Moody's analyst David Berge, "Town Sports has made progress in stabilizing the fee-based portion of its revenue stream, which is an important early step in the company's recovery. The ability to grow its membership base while demonstrating the viability of its pricing strategy in the highly-competitive fitness club sector will be key to future improvement in the company's credit profile."

Rating Actions:

Issuer: Town Sports International Holdings, Inc.

Corporate Family Rating, Affirmed at Caa2

Probability of Default Rating, Affirmed at Caa2-PD

Speculative Grade Liquidity Rating, Affirmed at SGL-3

Outlook, Changed to Stable from Negative

Issuer: Town Sports International, LLC

$45 Million Senior Secured Revolving Credit Facility due 2018, Upgraded to Caa1 (LGD3) from Caa2 (LGD3)

$325 Million ($201 Million Outstanding) Senior Secured Term Loan B due 2020, Upgraded to Caa1 (LGD3) from Caa2 (LGD3)

Outlook, Changed to Stable from Negative

RATINGS RATIONALE

The outlook for Town Sports ratings has been changed to stable from negative, in recognition of a moderation, and slight improvement in operating trends that supports expectations for a more stable revenue base through 2017, as the company continues to develop its longer-term pricing strategy while pursuing cost savings initiatives. Specifically, Moody's cites the company's recent reports that comparable club sales have picked up 0.7% year-over-year in Q1 2017, while membership levels continued to grow modestly. Membership dues revenue increased by approximately $1 million in this period, which Moody's views as an early sign that the company is able to maintain its customer base without significantly lowering pricing going forward. With the help of a cost-cutting program that the company initiated in 2016, profitability has improved and is expected to grow further. Nonetheless, while recent operating statistics are encouraging, Moody's believes that a moderate level of revenue and earnings growth over the next few years will be heavily dependent on successful execution of a disciplined pricing model, demonstrating that Town Sports can maintain a considerable premium to the low-price competitors while keeping its club count close to current levels. As such, uncertainty with respect to sustaining sales growth is a key factor weighing negatively on the Caa2 CFR. Therefore, it will be important that the company can demonstrate several quarters of steady revenue growth, including the resumption in non-dues based sales (e.g. personal training and ancillary club revenue), to support higher ratings considerations.

Despite having completed a restructuring of debt in 2016, Town Sports continues to carry a sizeable amount of obligations. With total adjusted debt of approximately $700 million, including Moody's standard adjustments to account for approximately $500 million of operating leases, we estimate debt to EBITDA at approximately 4.2 times as of March 31, 2017. Even so, this is relatively low for the Caa2 rating. Interest coverage, with EBITA to interest of approximately 0.7 times, maps better to ratings. We do not expect any material reduction in debt beyond mandatory term loan amortization over the next 12-24 months. Leverage could rise if the company cannot sustain the lower cost structures it has recently implemented, or if the company's revenue base continues to deteriorate, possibly due to persistent pressures on membership levels.

The ratings also incorporate Town Sports' regional concentration in the Mid-Atlantic and Northeast US markets, particularly in the New York City metro area. Also factored into ratings is the competitive pressure that the company faces from both high-end and low-cost fitness club operators within its key markets, as well as other fitness alternatives, which could limit growth opportunities. The ratings are supported by Town Sports' market position as a large-scale fitness club operator, strong brand awareness, and relatively favorable fundamentals for the health and fitness industry.

The ratings on Town Sports' senior secured credit facilities were upgraded to Caa1 from Caa2, one notch above the CFR, reflecting a material amount of first loss that would be absorbed by sizeable operating leases, per Moody's Loss Given Default Methodology.

The SGL-3 Speculative Grade Liquidity Rating reflects Moody's expectation that Town Sports will maintain an adequate liquidity profile over the next 12 months. As of March 31, 2017, the company had cash balances of $60 million, which Moody's expects will decline through 2017. Currently, the company has sufficient liquidity to fund basic cash needs, including $2.1 million of annual term loan amortization and close to $14 million of annual cash interest expense, as well as budgeted capital expenditures, for at least the next 12 to 18 months without relying on external financing. The company also has an undrawn $45 million revolving credit facility due 2018 ($3.85 million of outstanding letters of credit). The facility includes a total leverage covenant that restricts borrowing capacity under the revolver to 25% of the committed amount if total leverage (as defined by the Credit Agreement) is greater than 4.5x. As of December 31, 2016, the company was slightly below the maximum leverage threshold, which limits availability under the credit facility. All assets are encumbered to secure borrowings under the credit facility. The company could generate cash from the sale of owned club locations, however it would likely be required to apply a portion of the proceeds to debt prepayment. Aside from the revolver, the company has no material debt maturities until the term loan matures in 2020.

The stable ratings outlook reflects Moody's expectation that operating performance will gradually improve over the next 12 months, with favorable comparable club revenue trends and steady membership levels.

Ratings could upgraded if the company can achieve steady increases in membership count and drive robust comparable-club revenue growth with stronger EBITA margins. As well, the company would need to demonstrate positive free cash flow generation that ensues from growth in operating cash flow, without further reduction in capital spending.

Ratings could be downgraded if the company experiences a material decline in membership count, or if it faces the necessity of closing a significant number of unprofitable clubs. Lower ratings could also be warranted if Town Sports reports a return to a trend of weakening comparable-club revenue growth, or a deterioration of its liquidity profile.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Town Sports International Holdings, Inc., through its wholly-owned operating subsidiary Town Sports International, LLC, is one of the leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States. As of March 31, 2017, the company operated 150 fitness clubs under four key regional brand names: New York Sports Clubs, Boston Sports Clubs, Washington Sports Clubs, and Philadelphia Sports Clubs, as well as three clubs in Switzerland. These clubs collectively served approximately 551,000 members as of March 31, 2017. Revenue for the LTM period ending March 31, 2017 was $395 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

David Berge
Senior Vice President
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

Russell Solomon
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.
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