Town Sports & The Sound of Inevitability

• Gym & fitness center operator Town Sports International (NASDAQ: CLUB) revenue will collapse almost 30% from 2015e-2018e in our base case due to intense membership fee pressure, membership attrition, and membership type downgrades.
• High, inflexible costs from Company-operated, leased facilities subject to high northeast U.S. metro rent. Marginal improvement possible from headcount related cost cutting.
• Less money in the door and the same or more money out means cash flow will be severely negative for 2016-onlward. CLUB will run out of cash by 2017q3.
• The Firm’s largely untapped and 75% unavailable $45m revolver matures in 2018q4, while its $325m term loan ($295m out) matures 2020q4. The runway is not as long as it seems from the air.
• With the stock at all-time lows, down ~90% in two years, we do not expect the company will be able to raise cash through the equity markets. The firm’s existing senior debt is trading at distressed levels around 37; there is too much debt to service let alone repay, leaving further debt issuance or a simple refinancing transaction out of the question.
• We expect some sort of restructuring to be announced and underway by year-end 2016. Best case scenario for equity holders is severe dilution related to equity options/warrants granted as part of a distressed exchange.
• Due to the above, we reiterate our $0 price target for the stock with no rating.
• Town Sports and its creditors have reportedly already hired investment banks to advise on potential restructuring (Rothschild and PJT Partners, respectively).
• Neither the company nor the activist hedge funds controlling the company have disclosed the engagement of financial advisors or refuted reports. This may not be a direct violation of securities regulations but it is an intentional failure to report material (non-public) information to investors in the spirit of securities laws. Hell hath no fury like an investor in a money-losing company scorned.