24 Hour Fitness Starts To Reopen, But S&P Downgrades Debt Rating And Potential Bankruptcy Looms

Gym giant 24 Hour Fitness Worldwide has nearly four million members for its 440 clubs in 14 states, but the coronavirus has been a crippling blow for the chain since it announced the closing of all of its clubs on March 16. Franchises recently reopened in Dallas and Houston, and more openings are slated for the coming weeks. Yet, the company is facing severe headwinds.

S&P Global Ratings lowered its debt rating on the company from ‘CCC+’ to ‘D’ on Friday, citing the company’s failure to pay its June 1 interest payment on the senior notes due in 2022. S&P previously downgraded the rating in both March and November. 24 Hour Fitness entered a 30-day grace period, but S&P does not expect the company to make the payment during that time either.

“We believe that Covid-19-related fitness club closures have materially impaired the company’s liquidity position. In addition, there are credible press reports the company is seeking a debt restructuring or Chapter 11 bankruptcy filing,” per S&P’s research note issued Friday.

A ‘D’ is S&P Global’s lowest credit rating and is based on an obligation that is in “default or in breach of an imputed promise.” The definition further states: “The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to ‘D’ if it is subject to a distressed exchange offer.”

The fitness chain has $1.3 billion in debt from a 2014 leveraged buyout by AEA Investors and the Ontario Teachers’ Pension Plan. The company is actively seeking a buyer ahead of a court-supervised bankruptcy process, according to Bloomberg. 24 Hour Fitness did not reply to Forbes’ request for comment.

Gyms around the country are facing lawsuits for continuing to charge members after the coronavirus closures. 24 Hour Fitness suspended membership billing on April 16, after a social media backlash and a lawsuit filed by a gym member. The company would not comment on pending litigation for an April Forbes story.

The bigger challenge is how long it will take for people to return to gyms where sanitation and disease-spread in a confined space are concerns, with people sweating and breathing heavily.

The company announced Tuesday morning that it expects nearly 50% of its clubs to open in June and the rest of the portfolio to open by early August. It encouraged members to use its free 24GO app during the shutdown for access to 1,500 workouts that can be done anywhere.

24 Hour Fitness says a comprehensive program has been put in place to ensure “a healthy and safe club environment.” It includes touch-free check in; certain equipment removed; and signage in the clubs reminding members about social distancing and safety protocols. Clubs initially will require reservations made one day in advance on its app for 60-minute sessions. Gyms will close for 30 minutes after each workout session for cleaning.