Fitness First close to breach of bank covenants

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The largest health club group in the world – Fitness First – is facing tough discussions with its lenders as it moves close to breaching bank loan terms.

The gym chain, which employs 13,000 people and has 1.2 million members worldwide, is understood to be drawing up a turnaround strategy in a bid to persuade its banks to refinance its £550m debt burden.

But as it stands Fitness First, which has 430 clubs worldwide, including 140 in the UK, is currently set to breach banking covenant tests at the end of this month.

The chain’s owners, BC Partners, has fired the company’s top management team as part of an overhaul, including chief executive Colin Waggett, finance director Duncan Tatton-Brown and UK managing director John Gamble, it has been reported.

Meanwhile, other funds, including Monarch and Oaktree Capital, are understood to be circling the gym chain’s £530m of debt in hopes of a default.

Rothschild and veteran restructuring consultant Donald Featherstone, European head of the turnaround practice AlixPartners, have been hired as advisers on its negotiations with lenders.

Fitness First has in the last five years seen its underlying earnings decline from £146m to £115m last year.

But BC Partners’ biggest problem is that the entire debt is due to be repaid between this summer and September 2013, and therefore has to be refinanced.

BC is expected to inject more capital into the company as well as ask banks to take a “haircut” on what they are owed.

Other options include a debt-for-equity swap.

BC Partners was forced to pull a planned £1bn Singapore listing in 2011, after 17 of the 20 previous flotations tanked below their flotation listing price.

Fitness First, which is third-biggest in the UK market by membership and has a big presence in Asia and Australia, reversed its European expansion strategy in 2010 when it sold all its clubs in the Benelux countries, Spain and Italy.

Most of the group’s debt matures at the end of next year, but a revolving debt facility that is essential for the operative business is due to expire in Novem- ber.

BC Partners bought the gym chain in 2005 for £835m and spread the investment across two of its private equity funds.