(Bloomberg) -- The owner of the New York Sports Clubs and Lucille Roberts gyms sought bankruptcy protection from its creditors, unable to keep up with debt payments after the pandemic shut its gyms for months.
Town Sports International LLC filed a Chapter 11 petition in Delaware that allows the company to keep operating while it works out a plan to pay creditors, negotiate rent reductions and turn the business around. It estimates liabilities and assets of $500 million to $1 billion each.
Town Sports will close certain locations during the bankruptcy process depending on the outcome of talks with landlords. Management has sought as much as half off on rent, Bloomberg reported, as gyms across the country start to return to business.
In the meantime, Town Sports said in a statement on its website that senior lenders agreed to reduce its debt load and support ongoing operations. Current terms weren’t immediately disclosed, but the company said earlier this month that it could need about $80 million to finance the bankruptcy and cover operating shortfalls.
“Town Sports International is not going out of business,” the company said in Monday’s statement. “Restructuring is the best way to properly respond to the Covid-19 pandemic, with the long-term goal to emerge as a thriving powerhouse in the fitness industry.”
Analysts at Fitch Ratings cast doubt on that scenario, noting that the company had been on its list of vulnerable borrowers since February. “Town Sports’ recovery prospects appear bleak, with the term loan bid at 14 as of Friday, the third-lowest level for any company in the institutional loan universe,” Fitch said in an emailed statement.
Shares of Town Sports, which have been trading at penny-stock levels, lost as much as 28% of their remaining value on Monday.
New York and New Jersey recently allowed fitness centers to re-open at limited capacity. A number of gym chains were struggling with heavy debt loads even before the virus crippled the global economy and sent the fitness industry reeling. Gold’s Gym International Inc. sought court protection from its creditors in May. 24 Hour Fitness Worldwide Inc. filed for bankruptcy in June.
With a loan coming due in November, Town Sports warned in a March regulatory filing that there was doubt about its survival, and said in its filing earlier this month that shareholders could be wiped out. It had more than 180 New York, Boston, Philadelphia and Washington Sports Clubs, as well as Lucille Roberts and Total Woman Gym and Spa.
By April, management led by Chairman and Chief Executive Officer Patrick Walsh was weighing bankruptcy. The court process allows the company to reject or renegotiate its leases to save on rent, and Town Sports could close some gyms permanently depending on the outcome of talks with its creditors. About three dozen locations are in jeopardy, according to court papers.
Before the pandemic, Town Sports said it had about 9,200 employees, with 1,900 working full-time. The company expects payroll costs to double to about $2.5 million per bi-weekly pay period as it reopens some gyms while in bankruptcy, according to court documents. For the last three months the company has spent about $1.2 million each pay period. Before the pandemic, employee costs were about $5.6 million, the company said.
The filing comes after talks collapsed over financing that would have helped the chain weather the Covid-19 pandemic. With gyms mostly in the Northeast U.S., Town Sports has begun slowly re-opening some gyms under state and federal guidelines.
New York Governor Andrew Cuomo is letting gyms in the state resume operations, but with capacity limited to 33%. Customers and staff must wear masks at all times, and fitness centers must meet strict health and air-ventilation guidelines.
Town Sports previously was looking for a financial reprieve through a deal to buy the indoor cycling studio business of Flywheel Sports, which was owned by investment firm Kennedy Lewis.
The fitness chain, which has around 600,000 members, wanted to use part of the financing from Flywheel’s owners to replace its loan due in November.
New York Sports Clubs began operations as a cluster of squash clubs in the 1970s before introducing exercise classes and expanding up and down the U.S. East Coast.
The case is Town Sports International LLC, 20-12168, U.S. Bankruptcy Court, District of Delaware.
(Updates with company statement, Fitch comment, rent reductions and potential closings, starting in the second paragraph.)
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