24 Hour Fitness Pumps Up Debt Offering

24 Hour Fitness Worldwide, the second largest fitness company in the U.S., is planning to refinance existing debt with a new $340 million credit facility, $120 million of senior notes and $57 million of junior notes. The proposed credit facility has been assigned a B1 rating by Moody's Investors Service and a B rating by Standard & Poor's. The loan includes a five-year, $65 million revolver and a six-year, $275 million "B" loan. J.P. Morgan and Credit Suisse First Boston are leading the proposed credit facility, according to bankers.

"24 Hour Fitness has an excellent track record in terms of building out new facilities and is competitive relative to the industry in terms of its product offerings," said Paul Aran, v.p. and senior analyst with Moody's. "The company has a track record of success in store growth. The expectation is that they will successfully manage their growth in a way that leads to improving financial performance," he said. "Their high leverage is a reason why they do not enjoy a higher rating," he explained. For the year ended 2003, debt-to-free cash flow less capital expenditures is projected to be around 9.8 times.

Proceeds will be used for general corporate purposes and to refinance the company's existing $100 million revolver, of which only $7.7 million is outstanding, as well as a $98 million "B" loan and $142.5 million "C" piece. Aran suspects the company will continue to consider new club openings that are consistent with the kind of returns they have been able to achieve in the past. "We expect they will expand in a reasonably conservative manner that allows them to monitor the level of success of new clubs," he noted.

If competition does open in the same market, the product and size of the investment required to have a club equal to 24 Hour Fitness suggests it would be larger companies competing against them, Aran said. "Management seems results oriented and is expected to think carefully about entering the market in a manner that doesn't create an adverse situation." The ratings outlook is stable, reflecting the company's consistent operating growth at its core U.S. operations and expectations that free cash flow will remain positive, Moody's said. Colin Heggie, 24 Hour Fitness' cfo, did not return calls.