WW bonds shaky amid competition; ‘slim chance’ for Fed move; distressed index weak

By Cristal Cody

Tupelo, Miss., Jan. 23 – The new year is putting pressure on WW International Inc.’s bonds and stock.

The WeightWatchers owner faced an unhappy start to 2024 after Eli Lily & Co. announced on Jan. 4 a rival new digital health service that enables patients to receive the GLP-1 weight loss drugs Mounjaro and Zepbound.

WW International’s 4½% senior secured notes due 2029 (B3/B) traded higher in back-to-back sessions on Tuesday but remain down more than 10 points since the end of December.

WW’s stock is down nearly 50% so far in 2024.

“The app downloads are looking a little rocky here in January as we go into the diet season,” Linda Bolton Weiser, senior analyst for the health, beauty and leisure markets at D.A. Davidson & Co., told Prospect News on Tuesday.

“The company is very leveraged with a lot of debt,” she added. “The thought is if they ever get the stock higher than $10, somewhere down the road, the only way of deleveraging efficiently is through an equity offering. People think about that and the opportunity to buy back some of the bonds at an attractive level. Even in a turnaround state with cash flow improved, they still can’t whittle down that debt load fast enough.”

WW was estimated to have $1.42 billion of total debt at the end of 2023, unchanged from 2022.

This year, WW is estimated to reduce its total debt to $1.37 billion by the end of 2024 and to $1.27 billion at the close of 2025, according to a research note from D.A. Davidson.

WW’s total debt has declined from over $2 billion in 2016.

Chief executive officer Sima Sistani, who was brought on board in 2022, has helped fuel growth and turn the company around, Weiser noted.

The company made several changes in 2023, including to its board of directors and its brand with the $132 million cash and equity acquisition of telehealth platform Weekend Health, Inc., dba Sequence.

“They bought Sequence, so they’ve got a solution to the [weight loss] drug – instead of it being a threat, it’s a growth opportunity for them now,” Weiser said.

WW appointed new board chairman Thilo Semmelbauer in 2023, while two members on the board since its acquisition by Artal Luxembourg SA in 1999 stepped down as the company moves on from its ties to former owner and controlling shareholder global equity investment firm Artal. Artal sold its remaining minority stake in the company in May 2023 in a Rule 144A block trade.

The company set about adding new directors in 2023, including Dr. William Shrank, who previously was chief medical officer of Humana Inc.

WW boasts an impressive group on its board of directors that also includes Oprah Winfrey, a director since 2015 who acquired 3,696 shares of common stock on Jan. 1 for a total amount of securities owned following the transaction of 1.13 million shares.

WeightWatchers is expected to have an advantage over other competitors, including Eli Lily, since it offers behavior medication and is the strongest brand in weight loss, according to a D.A. Davidson note.

On Dec. 14, WeightWatchers announced the launch of the WeightWatchers GLP-1 Program to provide behavioral support for patients on the GLP-1 medications, whether prescribed by a primary care physician or WeightWatchers Clinic.

The company so far has not marketed the GLP-1 drug option to new or existing members because of continued drug shortages, though it is expected this month to start introducing its WeightWatchers Clinic in January.

In October, WW announced it was going after companies with its WeightWatchers for Business to offer a weight health platform for employers and health plans, including the new class of chronic weight management medications.

In the third quarter, WW reported positive subscriber growth for the first time since the fourth quarter of 2020, though sales missed forecasts.

WW’s fourth-quarter and fiscal 2023 results are expected in early March.

The company released its fourth quarter and full-year results for 2022 on March 6, 2023.

While analysts’ consensus has the company posting a 1% year-over-year revenue increase in the first quarter of 2024, that is “too high,” according to Weiser, who expects the resumption of year-over-year revenue growth to not occur until the third quarter.

Slim chances for Fed move

Earnings reports weighed on overall market tone on Tuesday as stocks declined and Treasury yields rose 4 basis points to 6 bps by midday but improved over the afternoon.

The Dow had dropped around 184 points over the morning but narrowed the day’s losses by the close to end down more than 96 points.

The iShares iBoxx High Yield Corporate Bond ETF fell 9 cents, or 0.12%, to $77.14.

Market volatility continued to recede over the session. The CBOE Volatility index dropped 4.85% to 12.55.

The benchmark 10-year note yield rose around 5 bps to 4.14% on Tuesday as focus shifted to next week’s Federal Reserve rate decision.

While there was some uncertainty back in the fall as yields ramped up, Treasury yields are expected to end 2024 much lower.

The 10-year note yield is expected to decline to 3.79% by the end of the year, a market source said.

“Not a lot is expected at the Fed meeting,” the source said of the Jan. 30-31 monetary policy meeting. “It’s a very slim chance they do anything at the next meeting. Overall, rates are expected to drop on the short end quite a bit.”

Meanwhile, distressed index returns have been pressured in January and remain weaker than other junk indexes.

WW softens in January

WW International’s 4½% senior secured notes due 2029 (B3/B) had rallied 7/8 point on Monday to 53 5/8 bid on more than $23 million of paper traded, market sources said.

By late Tuesday, the bonds improved to near the 53¾ bid to 54 bid area, but supply was much lighter on $5 million of volume.

The issue ended 2023 at 66½ bid, opened 2024 with a 64 handle and has drifted lower over the back half of January.

The New York-based WeightWatchers operator’s stock (Nasdaq: WW) fell 2.55% on Tuesday to $4.59, well off its 52-week high of $13.31.

Shares ended December at $8.75 and have been pressured since the markets returned from the holiday break and after Eli Lilly’s drug announcement.

“The stock was up 100% or so in 2023 off extreme lows,” Weiser said Tuesday. “More recently, the stock is down. Year to date, it’s down 49%.”

Distressed one-day returns up

S&P U.S. High Yield Corporate Distressed Bond index one-day total returns started the week stronger after finishing Monday at 0.45%, improved from 0.34% on Friday.

In the next highest returns seen Monday in S&P’s high yield index universe, the S&P U.S. High Yield Select Corporate Bond index posted a 0.31% return.

However, looking at month-to-date data, the distressed index has been the weakest in January with negative 2.42% of returns so far in 2024, compared to minus 0.4% of returns month-to-date in the next weakest index, the S&P U.S. High Yield Select Corporate Bond index.

S&P’s high-yield corporate bond indexes for Australia and Canada have been among the strongest year to date, data shows.

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