November 16, 2020 – The Debtors filed a First Amended Plan of Reorganization and a related Disclosure Statement [Docket Nos. 1231 and 1233, respectively]; and separately filed blacklines showing changes to the versions of those documents filed on October 7, 2020 [Docket No. 1235].

Significant amongst amendments to the Plan documents is new language reflecting the support of the Debtors' Official Committee of Unsecured Creditors (the "Committee") and also the abandonment of marketing efforts and hopes for an asset sale. The Disclosure Statement now adds: "Ultimately, no party, including parties that had previously expressed interest in participating in a transaction with respect to the Debtors’ assets prior to the Petition Date, submitted an indication of interest to acquire a portion of or all of the Debtors’ assets or to otherwise pursue a transaction with the Debtors. Given that no party submitted any such indication of interest, the Debtors do not intend to proceed with a second phase of their Postpetition Marketing Process at this time."

[Update] On November 17th, (i) the Court approved the Disclosure Statement [Docket No. 1243] and (ii) the Debtors filed solicitation versions of their Plan and Disclosure Statement [Docket Nos. 1245 and 1246, respectively].

Overview of the Plan

The First Amended Disclosure Statement [Docket No. 1233] notes, “The transactions contemplated in the Plan will maximize value and allow for the Debtors’ business to reorganize with a substantially reduced debt load and increasing their cash flow on a go-forward basis. Specifically, the proposed restructuring contemplates:

• a reduction of the Debtors’ funded debt as of the Petition Date of approximately $1.2 billion;
• a new money rights offering (the “Rights Offering”) pursuant to which eligible holders of Allowed DIP Claims will be distributed subscription rights (the ‘Subscription Rights’) to purchase 48,165,893 shares of New Preferred Equity Interests (as defined herein) issued by the Reorganized Parent (the ‘Rights Offering Shares’). The Rights Offering Shares issuable pursuant to the Plan shall have an aggregate investment amount of $65.0 million; and
• The Rights Offering Shares issuable pursuant to the Plan shall have an aggregate investment amount of $65.0 million; provided that such investment amount may be increased to up to $80.0 million in the aggregate with the consent of the Requisite Consenting Creditors and
• upon emergence from chapter 11, entry into a senior secured term loan facility in an aggregate initial principal amount of up to $200.0 million and an incremental uncommitted facility of up to $200.0 million (collectively, the ‘Exit Facility’).

The Debtors will use the proceeds of the Rights Offering to fund the costs and expenses of these Chapter 11 Cases and for working capital after emergence from chapter 11.”

What the above Plan summary critically omits, is the treatment of DIP claims, the holders of which are set to receive, inter alia, 95% of the emerged Debtors’ equity. The Disclosure Statement more specifically provides that holders of DIP claims are set to receive their pro rata share of: “

• 95.0% of the New Common Equity Interests (the ‘DIP Claims Equity Conversion’) at the per share equity value of the Reorganized Parent based on 100 million shares of the New Common Equity Interests issued by the Reorganized Parent (the ‘Undiscounted Price Per Share’), subject to dilution by the DIP Backstop Equity Issuance, the Rights Offering, the Warrants, the Management Incentive Plan, and conversions, if any, of the New Preferred Equity Interests; 
• up to $200.0 million of aggregate indebtedness under the Exit Facility; and 
• Subscription Rights to purchase the Rights Offering Shares, solely to the extent such DIP Lender becomes a party to the Restructuring Support Agreement by October 21, 2020.”

The Debtors’ $250.0mn of DIP financing is being provided by certain prepetition lenders and noteholders (i.e., the “Ad Hoc Group”) which beneficially own or control the majority of the indebtedness outstanding under the Debtors’ Prepetition Credit Facility and Senior Unsecured Notes.

The following is a first amended summary of classes, claims, voting rights and expected recoveries showing highlighted changes (defined terms are in the Plan and/or Disclosure Statement):

NB: Recoveries are based on a total enterprise value of approximately $538.0mn for the Debtors, together with their non-debtor affiliates. 

• Class 1 (“Priority Non-Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 100%.
• Class 3 (“Prepetition Credit Facility Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $690,784,861.41 and the estimated recovery is 2.5%. Each Holder shall receive, pursuant to the Restructuring Transactions, its Pro Rata share of 5.0% of the New Common Equity Interests, subject to dilution by the DIP Backstop Equity Issuance, the Warrants, the Management Incentive Plan and the conversion, if any, of New Preferred Equity Interests into New Common Equity Interests.
• Class 4 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $900,000,000 and the estimated recovery is 0.1%-1.0%. Each Holder of a General Unsecured Claim shall receive, without regard to the particular Debtor against which such Claim is Allowed:

1. with respect to each General Unsecured Claim that (i) is Allowed in an amount less than or equal to $250,000 or (ii) is held by an Ineligible GUC Holder and is Allowed in amount greater than $250,000 but less than or equal to $400,000, Cash in an amount equal to 1% of the amount of such Allowed General Unsecured Claim, to be funded from the General Unsecured Claim Recovery Cash Pool (the “GUC Cash Recovery”); and
2. with respect to each General Unsecured Claim that (i) is held by an Eligible GUC Holder and is Allowed in an amount greater than $250,000 but less than or equal to $400,000 or (ii) is Allowed in an amount greater than $400,000, its Pro Rata share of the Warrants; provided, that, if the number of Holders receiving Warrants will exceed 1,500, then the Debtors reserve the right to provide the GUC Cash Recovery (in lieu of its Pro Rata share of Warrants) to Eligible GUC Holders that hold General Unsecured Claims that are Allowed in an amount greater than $250,000 but less than or equal to $400,000 on account of such Claims, beginning with the Holder of the General Unsecured Claim Allowed in the smallest aggregate amount, such that the number of Holders that will receive Warrants does not exceed 1,500.

FN: The value of the Warrants has been estimated using a Black-Scholes valuation model to be $0.3 million to $2.2 million, with a midpoint of $1.0 million. 

• Class 5 (“Membership Agreement Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $13,000,000 and the estimated recovery is 5.0%-6.0%. Each holder shall receive, without regard to the particular Debtor against which such Claim is Allowed:

1. with respect to each Membership Agreement Claim that is Allowed in amount less than or equal to $250.00, a Gift Card in the amount of $25.00; and
2. with respect to each Membership Agreement Claim that is Allowed in amount greater than $250.00, a Gift Card in the amount of $50.00.

• Class 6 (“Intercompany Claims”) is impaired or unimpaired, deemed to reject or deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
• Class 7 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.
• Class 8 (“Intercompany Interests”) is impaired or unimpaired, deemed to reject, or deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
• Class 9 (“Parent Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.

The Disclosure Statement attached the following documents [Docket No. 1233]:

• Exhibit A: Plan
• Exhibit B: Restructuring Support Agreement
• Exhibit C: Debtors’ Organizational Structure
• Exhibit D: Financial Projections
• Exhibit E: Liquidation Analysis

Key Dates

• Plan Supplement Filing: December 4, 2020
• Voting Deadline: December 11, 2020
• Plan Confirmation Objection Deadline: December 11, 2020
• Confirmation Hearing: December 18, 2020

Principal Prepetition Shareholders

• AEA Investors: 42.7%
• Fitness Capital Partners LP: 31.2% and
• 2411967 Ontario Limited: 22.8%

Prepetition Indebtedness

Liquidation Analysis (low and high case, see Exhibit E of Disclosure Statement [Docket No. 1233] for notes and further breakdown by Debtor)

About the Debtors

24 Hour Fitness is one of the nation’s leading operators of health and fitness clubs. The Debtors operate out of their two headquarter locations in San Ramon, California, and Carlsbad, California. As of March 31, 2020, the Debtors served approximately 3.4million members in 445 locations across the United States, all of which are leased.

Prior to the March 2020 closure as a result of the COVID-19 pandemic, the Debtors operated in fourteen states and the District of Columbia, with 445 clubs serving approximately 3.4 million members.

Before implementing a reduction in force and a furlough program following the closure of the Debtors’ fitness clubs in connection with the COVID-19 pandemic, the Debtors employed approximately 19,200 individuals. Due to the closure of their clubs in March 2020, the Debtors furloughed approximately 17,800 individuals and reduced their workforce by approximately 700 individuals. After evaluating their go-forward club footprint and implementing certain strategic initiatives, the Debtors further reduced their workforce by approximately 8,300 individuals prior to commencing these chapter 11 cases. As of the Petition Date, the Debtors employ approximately 10,200 individuals, including approximately 8,100 individuals who are employed on a part-time basis.

Corporate Structure Chart

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