[Update: 10:30 p.m. Eastern, June 15: This story has been updated with additional details from the Chapter 11 filing for 24 Hour Fitness.]
24 Hour Fitness, San Ramon, California, filed for Chapter 11 bankruptcy on June 15 and plans to secure approximately $250 million in debtor-in-possession (DIP) financing, the company announced.
24 Hour will continue to reopen clubs through June and July, although it permanently closed 100 of its clubs last week and laid off 8,300 people at those clubs. (More details about the layoffs and the club closings—including a list of the closed clubs—can be found in this story.) Prior to the club closings and the layoffs, 24 Hour had 445 clubs in 14 states and 19.200 employees. It now has approximately 10,200 employees, including approximately 8,100 individuals who are employed on a part-time basis.
Subject to court approval, the DIP financing, combined with the company’s cash from operations, is expected to provide sufficient liquidity to allow 24 Hour to continue operations, including club reopenings, without interruption during the Chapter 11 process. Because of the COVID-19-related temporary club closures, 24 Hour has brought in essentially no revenue since March 16. It has less than $10 million in cash on hand, and despite the capital-intensive reopenings of some clubs, it does not anticipate generating any material cash flow during the short term, according to the Chapter 11 filing. 24 Hour anticipates that its weekly receipts will be no more than $2 million until the week ended July 24, 2020, and its total cash receipts are projected to be less than $2 million in the aggregate for the first four weeks of the Chapter 11 process. However, 24 Hour projects its operating expenses will total approximately $30 million during the first four weeks after the Chapter 11 filing, not including the expenses of the restructuring filing.
24 Hour also has asked the court for authorization to continue paying team members’ wages, salaries and benefits and to continue its member programs. As a result, the company’s salaried and hourly team members should continue to be paid on the normal schedule.
The 35-year-old company blamed the Chapter 11 filing on the disproportionate impact of the COVID-19 pandemic, according to the filing in the U.S. Bankruptcy Court for the District of Delaware.
“If it were not for COVID-19 and its devastating effects, we would not be filing for Chapter 11,” 24 Hour Fitness CEO Tony Ueber said in the Chapter 11 announcement. “With that said, we intend to use the process to strengthen the future of 24 Hour Fitness for our team and club members, as well as our stakeholders. We expect to have substantial financing with a path to restructuring our balance sheet and operations to ensure a resilient future. The COVID-19 environment has proved that attention to health and fitness are more important now than ever before. As a result of this restructuring, we will gain financial strength and flexibility to accelerate our business transformation plan, which includes reinvestment in our existing clubs, opening new clubs and introducing several new innovative products and services that will enhance the fitness experience for our club members and guests for many years to come.”
The pandemic may have been the final straw, but the company had been in some financial distress prior to the COVID-19 pandemic. Around the time of the March 16 temporary COVID-19 caused shutdown of all 24 Hour locations, the company had been working with creditors to rework its debt load. The company’s total debt is $1.4 billion, according to its Chapter 11 filing. The debt includes $500 million in unsecured bond debt due in 2022 and $930.3 million in principal amounts outstanding under its prepetition credit facility as well as rental expense for its clubs.
In November 2019, 24 Hour Fitness bonds were trading at 44 cents on the dollar, the Wall Street Journal noted in a separate story, necessitating a meeting with bondholders that month. In late March after the shutdown, the company’s bonds were trading at 32 cents on the dollar. The company’s membership reportedly dropped from 3.5 million members to 3.4 million, and its fourth quarter 2019 earnings declined by 2 percent, Bloomberg reported, blaming some of the decline on the “rocky debut” of 24 Hour’s automated member sign-up process. An industry source shared with Club Industry that some of the distress was also due to high rent and the increase in minimum wage in some states in which the company operates.
In 2019, 24 Hour Fitness generated revenue of $1.5 billion and adjusted EBITDA of $191 million and less than $9 million cash on hand, according to its filing.
On May 31, 24 Hour Fitness reopened some clubs in Florida, Hawaii and Texas with new protocols to comply with local and state guidelines. The company expects to reopen the majority of its footprint in a phased approach by the end of June. Its website lists the planned reopening dates for its remaining clubs that are temporarily closed.
24 Hour Fitness is owned by private-equity firm AEA Investors and the Ontario Teachers’ Pension Plan, which purchased the brand in 2014 for $1.85 billion.