S&P raises 24 Hour Fitness outlook, rates loan B

Standard & Poor's assigned its B rating to 24 Hour Fitness Worldwide Inc.'s proposed $65 million secured revolving credit facility due 2008 and to the proposed $275 million term loan B due 2009.

The loans were rated at the same level as the corporate credit rating. Proceeds are expected to be used to refinance existing debt and for general corporate purposes, the agency said.

At the same time, S&P said it revised its outlook on the ratings to positive from negative due to enhanced liquidity from the proposed transaction and the company's improving credit measures. All existing ratings, including the B corporate credit rating, were affirmed.

The ratings reflect 24 Hour Fitness' debt-financed growth strategy, high financial risks, and the highly competitive fitness industry. These considerations are partly offset by the company's modest geographic diversity, several market-leading club clusters, strong brand name, and positive discretionary cash flow.

S&P noted that the company's operating cash flow has grown during the past several years, attributable to acquisitions, new club openings, and increased existing club sales. The ratings agency said this trend is likely to continue as the company refocuses on domestic club growth.

For the 12 months ended Sept. 30, lease adjusted EBITDA coverage of interest expense, pro forma for the financing, was 1.55x, up from 1.23x at the end of 2001. Similarly, pro forma lease adjusted total debt over EBITDA improved to 6.38x from 8.17x over the same period. 24 Hour Fitness generated positive discretionary cash flow during the past two and a half years, despite weak economic conditions.

In its analysis of the proposed credit facility, S&P noted the credit agreement includes covenants that require the company to maintain at least a 3.0x cash interest coverage and a maximum 2.5x senior secured leverage and 4x total leverage in 2003. These tests would become more restrictive in 2005 and throughout the remaining terms of the loan.

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