Gyms Struggle to Remain Financially Fit During the COVID-19 Pandemic

The traditional fitness industry is among the industries hit hardest by the COVID-19 pandemic. Gym and health club bankruptcies have skyrocketed since lockdowns began in March: Fitness powerhouses like Gold’s Gym,[1] 24 Hour Fitness[2] and Town Sports[3] filed for bankruptcy protection this summer, in addition to many smaller entities that have filed for bankruptcy or closed.

Gyms have struggled to overcome numerous hurdles. State governments closed many locations for extended periods of time, leading many gyms to suspend monthly payments, or suffer elevated levels of cancellations and chargebacks. Once open, gyms needed to change their operations in ways that made them less profitable, such as by limiting participation in classes, reducing the number of customers permitted in the facility, and closing amenities like saunas, steam rooms and locker rooms. Gyms have also purchased additional supplies and safety equipment ranging from disinfectant sprays to touchless water fountains and electrostatic sprayers.

This lost revenue and reduced profitability has led to difficulty paying rent, payroll and other debts. Gold’s Gym owed $7 million in back rent at the time it filed bankruptcy and it sought to reject 32 leases.[4] Gold’s Gym and 24 Hour Fitness reported that they closed all of their locations for months and furloughed 4,597 and 17,800 employees, respectively.[5]

COVID-19 has also helped at-home gym competitors break through. Many customers working from home have opted for at-home exercise alternatives like the Peloton bike, Lululemon’s Mirror and Tonal. For example, Peloton reported a quarterly 172% year-over-year sales increase[6] and expects shipping delays (at times, months-long) to continue into 2021.[7]

The Town Sports bankruptcy makes for an interesting example of the struggles facing gyms in a restructuring proceeding. On Sept. 14, 2020, Town Sports and 161 of its affiliates (collectively, “Town Sports”) filed chapter 11 petitions. Before the pandemic, Town Sports operated 186 clubs with roughly 9,200 employees and 605,000 members. By April 2020, every Town Sports club was closed as a result of the government lockdowns. By May 2020, Town Sports announced that it had terminated all nonexecutive employees and suspended all membership dues. And the New York attorney general recently sued Town Sports, alleging that it failed to honor cancellation requests and unlawfully resumed charging for memberships while the member’s main club was closed.[8]

These problems were compounded by the looming maturity of Town Sports’s secured debt facilities. Town Sports had access to a $325 million senior secured credit facility and a $15 million revolving loan facility set to mature on Nov. 15, 2020, and Aug. 14, 2020, respectively. As of the petition date, Town Sports owed approximately $167.5 million of secured debt in addition to $74 million in scheduled trade claims and unsecured debt.[9]

Despite these issues and concerns that in-person gyms may struggle to lure customers back indoors, Town Sports’ secured lenders competed to offer DIP financing. Kennedy Lewis Investment Management LLC (KLIM), the second-largest Town Sports shareholder, held 45% of Town Sports’s pre-petition secured debt and proposed a DIP facility conditioned upon consensual priming of the secured debt. Town Sports preferred this proposal, which it argued provided “more substantial and immediate liquidity,”[10] greater potential to assume and assign leases that would preserve growth opportunities and jobs, and “sufficient[], up-front capital to satisfy administrative expenses through a marketing process for the sale of the Debtors’ assets.”[11]

The competing DIP facility offer came from Tacit Capital (“Tacit”) and an ad hoc group of certain pre-petition lenders (the “Ad Hoc Lender Group”). The Ad Hoc Lender Group collectively owned a majority of the pre-petition secured debt and declined to consent to the KLIM DIP facility priming their liens. The Ad Hoc Lender Group alleged that Town Sports had improperly favored the KLIM DIP because KLIM was a major shareholder. These allegations included that Town Sports had “stonewall[ed]” the Ad Hoc Lender Group’s requests for loan due diligence, prepared inadequate marketing materials, and declined to contact 11 of 12 parties the Ad Hoc Lender Group felt may be interested in a strategic transaction.[12]

Closed-door negotiations led to a consensual resolution where Tacit provided the DIP financing, which Town Sports’s counsel stated at a hearing saved thousands of jobs, and Tacit became the stalking-horse bidder to purchase Town Sports. Ultimately, on Nov. 4, 2020, Tacit’s $80 million credit bid to acquire Town Sports was accepted as the successful bid.[13]

KLIM and Tacit were betting that customers will feel safe enough to exercise in indoor gyms in the near future. Perhaps they will, especially if gyms can adapt effectively to changing consumer preferences and a vaccine is widely available soon: Pfizer Inc. recently announced that an interim analysis of its vaccine candidate showed an efficacy rate of over 90%.[14] But clients who develop an at-home routine or high-margin clients that spend four figures on a Mirror or Peloton bike may be difficult to win back. With coronavirus cases at an all-time high in the fall of 2020,[15] there is a serious question as to whether and when the traditional fitness industry will return to its pre-COVID-19 levels of revenue.

Only time will tell.