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Rating Action:

Moody's downgrades Town Sports' CFR to B3; outlook stable

16 Mar 2015

Approximately $353 million of rated debt securities affected

New York, March 16, 2015 -- Moody's Investors Service downgraded Town Sports International Holdings, Inc.'s ("TSIH") Corporate Family Rating (CFR) to B3 from B2 and its Probability of Default Rating (PDR) to B3-PD from B2-PD. In connection with this action, Moody's also lowered the ratings on Town Sports International, LLC's ("TSI") senior secured bank facility to B3 from B1. TSI is a wholly-owned subsidiary of TSIH (collectively, "Town Sports"). In a related action, Moody's downgraded Town Sports' Speculative Grade Liquidity Rating to SGL-3 from SGL-2. The rating outlook is stable.

The downgrade of Town Sports' CFR reflects the continued deterioration in the company's key credit metrics and Moody's view that debt/EBITDA will be sustained above 6.0x through the end of 2016. The weakness is being driven primarily by sharp a decline in membership count and increased costs associated with new initiatives to improve operating performance and competitive position. EBITA margin fell almost 700 basis points to 11% in 2014, and Moody's projects that margins will likely remain below 10% over the near term (all ratios incorporate Moody's standard adjustments).

The downgrades of the ratings on the senior secured revolver and first-lien term loan to B3 follow from the one-notch downgrade of Town Sports' CFR. Moody's also believes that the support being provided to the bank facility by the relatively large amount of lease rejection claims (in a default scenario) is currently offset by potentially higher-than-expected loss severity, bringing the bank facility rating in line with the CFR.

The downgrade of the Speculative Grade Liquidity Rating to SGL-3 reflects a deterioration in Town Sports' liquidity profile. Total leverage (as defined by the Credit Agreement) as of September 30, 2014 exceeded 4.5x, triggering a 75% availability block under the revolving credit facility, leaving the company with only $11.25 million of borrowing capacity until it comes into compliance with the covenant.

The following ratings were downgraded:

Town Sports International Holdings, Inc.

Corporate Family Rating downgraded to B3 from B2;

Probability of Default Rating downgraded to B3-PD from B2-PD;

Speculative Grade Liquidity Rating downgraded to SGL-3 from SGL-2;

Town Sports International, LLC

$45 million Senior Secured Revolving Credit Facility due 2018 downgraded to B3 (LGD3) from B1 (LGD3);

$308.3 million Senior Secured Term Loan B due 2020 downgraded to B3 (LGD3) from B1 (LGD3);

RATING RATIONALE

The B3 CFR reflects Moody's view that Town Sports will maintain elevated debt leverage over the next 12 to 18 months and that operating performance will continue to weaken. Debt reduction will likely be limited to mandatory term loan amortization, resulting in debt/EBITDA remaining above 6.0x through the end of 2016. The rating also takes into consideration the company's low operating margins. Moody's believes EBITA margin will fall below 10% in 2015 due to declining revenues and increased costs associated with new club openings and initiatives aimed at growing membership count. In addition, the rating incorporates Moody's concern regarding Town Sports' regional concentration in the Mid-Atlantic and Northeast US regions, particularly in the New York City metro area. Also factored into the rating is the competitive pressure from existing high-end and low-cost fitness club operators within its key markets, which could limit growth opportunities. There is still uncertainty as to how quickly the new "High Value, Low Price" ('HVLP") conversion plan will turn around negative comparable store sales growth, but early indications signal a potential for sustained improvement in membership count. The ratings are supported by Town Sports' business position as a large-scale fitness club operator, strong brand awareness and favorable fundamentals for the health/fitness industry.

The rating on the senior secured credit facility reflects the overall probability of default for Town Sports, which Moody's rates B3-PD. The B3 ratings on the revolver and first-lien term loan are in line the CFR, as the bank facility comprises 100% of the company's debt capital structure.

The SGL-3 Speculative Grade Liquidity Rating reflects Moody's view that Town Sports currently has an adequate liquidity profile. As of December 31, 2014, the company had a cash balance of $93 million and Moody's expects the company to generate close to approximately $10 million in free cash flow in 2015. The company also has a $45 million revolving credit facility due 2018, which is currently undrawn except for $3 million of outstanding letters of credit issued under the facility. The revolver 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, 2014, the company exceeded the maximum leverage threshold, resulting in total current borrowing capacity (excluding up to $5.5 million of letters of credit) of $11.25 million until it can maintain compliance with the financial covenant. All assets are encumbered to secure borrowings under the credit facility. Aside from the revolver, the company has no material debt maturities until the term loan matures in 2020.

The stable rating outlook reflects Moody's expectation that the membership counts will gradually increase as a result of the HVLP strategy and that the company could experience slight growth in revenues over the next 18 months. The outlook also considers Town Sports' strong brand recognition in each of its markets, as well as, increasingly favorable long-term fundamentals for the fitness industry.

Town Sports' ratings could be upgraded if the company demonstrates continued growth in membership count and comparable store sales trends resulting in debt/EBITDA nearing 5.0x, EBITA interest coverage sustained above 1.0x, and an improved liquidity profile with full access to the revolving credit facility.

The ratings could be downgraded if membership count and comparable store sales continue to weaken, EBITA interest coverage remains below 1.0x, or liquidity deteriorates materially.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. 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.

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, 2014, the company operated 158 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. In 2014, the company introduced BFX Studio, its private studio brand, which offers cycling, personal training and group exercise classes. These clubs collectively served approximately 484,000 members as of December 31, 2014. Revenue for the fiscal year ended December 31, 2014 was $454 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 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

Manish Desai
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 B3; outlook stable
No Related Data.
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