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Rating Action:

Moody's downgrades Town Sports CFR to B2; rating outlook stable

13 Mar 2014

Approximately $370 million of bank debt rated

New York, March 13, 2014 -- Moody's Investors Service downgraded the ratings of Town Sports International Holdings, Inc. ("TSIH"), including its Corporate Family Rating to B2 from B1, and the senior secured bank facility of Town Sports International, LLC ("TSI", which is a wholly-owned subsidiary of TSIH - collectively referred to as "Town Sports") to B1 from Ba3. The rating outlook is stable.

The downgrade of Town Sports' ratings reflects the company's declining EBITDA -- due to decreasing membership counts and negative comparable same store sales growth over the past 5 fiscal quarters -- and Moody's expectation that profitability will decline further over the next year amid increasing competition in the fitness club sector. Town Sports management has publicly stated it expects the company's EBITDA to be down between 15% and 20% for the full year 2014 as compared to fiscal 2013. This decline in EBITDA -- assuming no change in debt -- will result in Moody's adjusted leverage (all metrics cited include Moody's standard adjustments, including operating leases) increasing to approximately 5.4 times at the end of fiscal 2014.

The following is the summary of rating activity for Town Sports International Holdings, Inc.

Ratings downgraded:

Corporate Family Rating to B2 from B1

Probability of Default Rating to B2-PD from B1-PD

Rating affirmed:

Speculative Grade Liquidity rating at SGL-2

The following is the summary of rating activity for Town Sports International, LLC

Ratings downgraded:

$45 million senior secured revolving credit facility due 2018 to B1 (LGD 3, 40%) from Ba3 (LGD 3, 39%)

$325 million senior secured term loan B due 2020 to B1 (LGD 3, 40%) from Ba3 (LGD 3, 39%)

RATING RATIONALE

The B2 Corporate Family Rating reflects Town Sports' high leverage and modest interest coverage (EBITDA less capex/interest), expected to be about 5.4 times and 1.5 times (excluding discretionary spending), respectively, at the end of fiscal 2014. Town Sports' earnings are affected by increasing competition from lower-cost clubs and smaller clubs that offer a single, pay-as-you-go, type of workout, such as spinning or boot camp. In each of the past five quarters, Town Sports membership count and comparable same store sales have been negative. The B2 Corporate Family rating also takes into consideration Town Sports' modest scale and exposure to discretionary consumer spending trends. In addition, its operating performance is strongly tied to the economic health of the Mid-Atlantic and Northeast markets it serves, and more specifically the New York City metro, where a majority of its clubs are located. The rating is supported by the company's business position as a large-scale fitness club operator, strong brand awareness, and the favorable long-term fundamentals for the fitness industry.

The B1 rating on the first lien secured credit facility reflects both the overall probability of default of the company, reflected in the Probability of Default Rating of B2-PD, and a loss given default assessment of LGD 3 (40%). The secured credit facility receives a one notch uplift from the Corporate Family Rating, reflecting the assumption that there will be a relatively large amount of lease rejection claims in a default scenario that provide support to the secured debt. Given the covenant light nature of the proposed credit agreement, we expect an average overall recovery rate of 50% in a default scenario, which is consistent with Moody's Loss Given Default Methodology.

The stable rating outlook reflects our expectation that over the next 12 to 18 months Town Sports' membership count and same store sales will continue to be pressured by additional competition, and free cash flow will be consumed by growth activities, resulting in debt/EBITDA maintained around 5.5 times.

Town Sports' ratings could be downgraded if the company is unable to turn around negative membership count and comparable store sales trends, leading to debt/EBITDA sustained above 6.0 times, EBITDA less capex coverage of interest expense of about 1.25 times (excluding discretionary spending), or a material weakening of liquidity.

Town Sports' ratings could be upgraded if the company improves membership count and comparable store sales trends resulting in debt/EBITDA stabilized below 4.5 times.

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 December 31, 2013, the company operated 162 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 497,000 members as of December 31, 2013. Revenue for the twelve months ended December 31, 2013 was $470 million.

The principal methodology used in this rating was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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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 rating action on the support provider and in relation to each particular 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.

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Peter Trombetta
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades Town Sports CFR to B2; rating outlook stable
No Related Data.
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