MOODY’S ASSIGNS B1 RATING TO 24 HOUR FITNESS WORLDWIDE’S $340M SR SECURED CREDIT FACILITY; OUTLOOK STABLE

Moody’s has assigned a B1 rating to 24 Hour Fitness Worldwide’s proposed $340 million senior secured credit facility.  The ratings reflect the company’s high leverage, low interest coverage, and large capital expenditures focused on growth.  The ratings also reflect the company’s positive free cash flow after capital expenditures, diversified club base, and reasonable club stability.

Moody’s has assigned the following ratings:

$65 million Senior Secured Revolving Credit Facility, due 2008, rated B1;

$275 million Senior Secured Term Loan, due 2009, rated B1;

Senior Implied, rated B1;

Senior Unsecured Issuer Rating, rated B2.

The ratings outlook is stable.

Proceeds from the proposed $340 million senior secured credit facility will be used to refinance the Company’s existing $100 million revolving credit facility ($7.7 million outstanding), $98 million Term Loan B, and $142.5 million Term Loan C.  The $65 million revolving credit facility is not expected to be drawn at closing and will be available for general corporate purposes.  The proposed ratings also reflect Moody’s expectations that the company’s final covenants will be set at levels that allow for flexibility in the normal course of business.

The ratings are constrained by the company’s high leverage and low interest coverage. The company's historical financing costs have resulted in a funding structure that does not currently reflect recent years’ operational improvement. The company’s relatively high cost of capital pressures its interest coverage ratios. The company’s ratings are also constrained by its high levels of rent expense and low levels of tangible asset coverage.

The ratings benefit from positive free cash flow and a diversified club base.  24 Hour Fitness also benefits from its position as the second largest fitness company in the United States, and from historical investments in clubs that continue to generate increasing levels of free cash flow as clubs mature. Continued success in managing its operations should lead to an improving cost of capital over time, thereby further enhancing the company’s interest coverage levels.

The stable rating outlook reflects the company’s track record of consistent operating growth at its core U.S. operations and expectations that free cash flow will remain positive. The ratings could be negatively impacted by competitive pricing pressures, significant debt financed acquisitions, or a deterioration in its interest coverage ratios. The ratings could be positively impacted if the company successfully reduces its cost of capital, de-leverages, and significantly improves its margins.

For the year ended 2003, projected debt to EBITDA before and after $96 million of convertible preferred stock is expected to be approximately 2.8x and 3.4x, respectively.  Total adjusted debt to EBITDA, adjusted for $158 million of leases, is expected to be 5.8x for 2003.  EBITDA coverage of total interest is expected to be 2.5x and EBITDA less capital expenditures coverage of interest is expected to be 1.6x. Debt to free cash flow less capital expenditures is expected to be around 9.8x.

The B1 rating on the proposed $340 million senior secured credit facility reflects the benefits and limitations of the collateral package.  The facility will be secured by stock and assets (including both tangible and intangible assets) of the Borrower and its direct and indirect domestic subsidiaries, and 66% of the stock of the first tier foreign subsidiaries.  The term loan requires amortization of 1% per annum for the first five years, with the remainder due in year 6.  Additional amortization will be provided by a cash flow sweep that ranges from 50% to 75% of free cash flow.

The $120 million senior subordinated notes, not rated by Moody’s, are contractually subordinated to the bank debt and senior to all series of preferred and common stock. The notes are also guaranteed by all domestic subsidiaries and certain foreign subsidiaries. The $57 million of junior subordinated notes, also not rated by Moody’s, are contractually subordinated to the bank debt and to the senior subordinated notes and senior to all series of preferred and common stock.

Headquartered in San Ramon, California, 24 Hour Fitness Worldwide, Inc. is the second largest fitness club operator with 304 fitness clubs in the Unites States and 10 in Asia. The company has approximately 2.8 million members.  Revenues for 2002 were approximately $928 million.