OREANDA-NEWS. S&P Global Ratings today said it raised its corporate credit rating on Fitness International LLC to 'B+' from 'B'. The rating outlook is stable.

At the same time, we raised our issue-level rating to 'B+' from 'B' on the company's proposed amended senior secured credit facility, consisting of a $337.5 million revolver, a $337.5 million term loan A, and a $1.2 billion term loan B, all due in 2020. The recovery rating remains '3' and reflects our expectation for meaningful (50%-70%; upper half of the range) recovery for lenders in the event of a payment default. This is despite incremental borrowings because the recapitalization transactions will increase the level of fixed charges that would trigger a default, resulting in a higher level of emergence EBITDA. Also, club additions over the past few years, and anticipated club additions over the next few years, will increase the size of the company's club base in a manner that warrants a higher emergence valuation.

"The upgrade reflects our expectation that the company will maintain total lease-adjusted debt to EBITDA below 5.5x," said S&P Global Ratings credit analyst Justin Gerstley.

This is because proceeds from incremental borrowings to finance the buyback of common equity from a portion of minority sponsor owners, combined with the conversion of some minority sponsors' remaining common equity stakes to preferred equity (which we view as debtlike obligations), likely completes the leveraging impact from equity repurchases (and conversions) over the next few years. Because there are provisions in the terms of the converted preferred equity that could ultimately result in its redemption, we include the preferred equity as a debtlike obligation in our base-case forecast for credit measures. As a result, any future redemption of the preferred equity stakes would not likely be an incremental leveraging event. In addition, through debt repayment and good operating performance over the past two years, the company has built in sufficient leverage capacity to accommodate the current proposed incremental debt transactions and achieve an improved financial risk assessment and a one-notch higher rating.

The stable outlook reflects our expectation for good operating performance through 2017 and our belief that the company will not likely engage in incremental leveraging transactions to fund distributions that would increase total lease-adjusted debt to EBITDA above 5.5x.