December 23, 2020 – The Debtors notified the Court that their Second Amended Chapter 11 Plan of Liquidation had become effective as of December 22, 2020 [Docket No. 849]. The Court has previously approved the Debtors’ Plan on December 18, 2020 [Docket No. 828].

On September 13, 2020, Town Sports International, LLC and 161 affiliated Debtors (“Town Sports” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-12168. At filing, the Debtors, owner/operators of 186 fitness clubs (99 in New York, including under the “New York Sports Clubs” brand) noted estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn. In a subsequently filed Schedule A/B, the lead Debtor noted $28.9mn of assets and $649.03mn of liabilities [Docket No. 372].

The Debtors were represented by (i) Young Conaway Stargatt & Taylor LLP as local bankruptcy counsel, (ii) Kirkland & Ellis LLP as general bankruptcy counsel, (iii) Houlihan Lokey,Inc. as financial advisors and investment banker and (iv) Epiq Corporate Restructuring as claims agent.

Deadlines of January 21, 2021 and February 22, 2021 have been set for administrative claims and professional fee claims, respectively.

Overview of the Plan

The Plan was confirmed notwithstanding the Debtors' failure to garner the support of their prepetition term loan lenders who have unusually now been crammed down by the Plan's only other voting class, with that class comprised of general unsecured creditors who are receiving a (less than) 1% return. As discussed further below, the Debtors stress that the dissenting term loan lenders were acting in "breach of their obligations under the Settlement Agreement to support and vote for the Plan," a settlement agreement which "this Court has already ruled is binding on the Term Loan Group."

The Debtors' memorandum in support of Plan confirmation (the "Memorandum") [Docket No. 773] notes, “Confirmation of the Plan is the culmination of hard-fought, good-faith negotiations among and between the Debtors and their key stakeholders — an effort that includes the consummation of a value-maximizing going-concern sale transaction that saved a substantial number of jobs, benefits customers and ensures vendors and other stakeholders will have an opportunity to transact with the Purchaser on a go-forward basis. The Plan structure — including the Prepetition Term Lender’s 20 percent equity stake in the go-forward business on account of the sale transaction and a $1 million contribution from the Purchaser to the General Unsecured Creditors — was negotiated between the Debtors, the Term Lender Group and the Purchaser (as applicable) as part of the Stalking Horse Bid negotiations. This cash contribution was intended to — and in fact did — help facilitate a smooth chapter 11 case that did not unnecessarily utilize estate resources. But, the agreed contribution was not on account of any particular estate asset or cause of action.

Later, as part of Plan negotiations, the Committee negotiated for the Non-Released Claims Trust, funded from the agreed $1 million Purchaser contribution to unsecured creditors. This resolution with the Committee was supported by the Debtors and other primary stakeholders, including the Term Loan Group and the Purchaser. The Committee supports the Plan. Without these hard-fought negotiations, there would likely be no recovery to unsecured creditors and the Debtors’ estate may be administratively insolvent. But, because of the global consensus reached as part of the Stalking Horse Bid, the Plan brings an orderly, efficient and value-maximizing conclusion to these Chapter 11 Cases."

The First Amended Disclosure Statement [Docket No. 549] adds, “Prior to the Petition Date, the… Debtors engaged with certain of their prepetition lenders on the potential terms of DIP financing and an overall restructuring transaction. In connection with these conversations, the Debtors had interest from two groups of Prepetition Lenders regarding potential financing proposals. After further negotiations with both parties, and upon review of each of their respective proposals, the Debtors ultimately decided to move forward with the proposal submitted by Tacit Capital (‘Tacit’), in collaboration with the applicable ad hoc group of Prepetition Lenders. Tacit’s proposal consisted of a DIP facility, coupled with a going-concern credit bid of substantially all of the Debtors’ assets. That bid formed the basis for the Debtors’ DIP financing and stalking horse bid.

Generally speaking, the Plan: 

• provides the vesting of all Available Cash from the proceeds of Sale Transaction in the Post-Effective Date Debtors for the purpose of distribution to Holders of Claims;
• provides for the full and final resolution of funded debt obligations;
• designates a Plan Administrator to wind down the Debtors’ affairs, pay and reconcile Claims and administer the Plan in an efficacious manner;
• contemplates recoveries to Holders of Administrative Claims, Secured Tax Claims, Priority Tax Claims, Other Priority Claims and Other Secured Claims as is necessary to satisfy section 1129 of the Bankruptcy Code; and
• provides for the creation of a Non-Released Claims Trust for the purpose of investigating and, if appropriate, pursuing the Non-Released Claims Trust Causes of Action, solely to the extent of available insurance coverage (pursuant to the terms specified in Article VIII.C.3 of the Plan), for the benefit of the Non-Released Claims Trust Beneficiaries.”

The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, also see Liquidation Analysis below):

• Class 1 (“Secured Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is TBD 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 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is TBD and the estimated recovery is 100%.
• Class 4 (“Prepetition Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $167,163,283.42 and the estimated recovery is 47.8%. Each Holder of a Prepetition Loan Claim shall receive its Pro Rata share of (not to exceed the amount of such Holder’s Prepetition Loan Claim) the Excess Distributable Cash in accordance with the distribution waterfall set forth in Article IV.C of the Plan. For the avoidance of doubt, no Holder of a Prepetition Loan Claim shall receive any Non-Released Claims Trust Interests or otherwise participate in the distributions to the Holders of Class 5 General Unsecured Claims under this Plan, including on account of any deficiency claims. ^FN: For the avoidance of doubt, the projected recovery for Holders of Class 4 Prepetition Loan Claims reflects the Term Lender Group’s $80 million credit bid.
• Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $109.0mn – $218.0mn and the estimated recovery is 0.5% – 1.0%. Each Holder of a General Unsecured Claim shall receive: its Pro Rata share of the (i) Non-Released Claim Trust Interests; and (ii) a complete waiver and release of any and all Claims, Causes of Action and other rights against the Holders of Class 5 Claims based on claims pursuant to chapter 5 of the Bankruptcy Code or under similar or related state or federal statutes and common law, including fraudulent transfer laws from the Debtors, the Post-Effective Date Debtors and their respective Estates.
• Class 6 (“Intercompany Claims”) is unimpaired, deemed to accept or reject, 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 (“Intercompany Interests”) is unimpaired, deemed to accept or reject and not entitled to vote on the Plan. The aggregate amount of interests is N/A and the estimated recovery is N/A.
• Class 8 (“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 9 (“Interests in TSI”) is impaired and not entitled to vote on the Plan. The aggregate amount of interests is N/A and the estimated recovery is 0%.

Voting Results

On December 10, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 775], which were as follows.

• Class 4 (“Prepetition Loan Claims“): 5 claim holders, representing $83,819,577.35 (61.41%) in amount and 31.25% in number, voted in favor of the Plan. 11 claims holders, representing $52,671,954.81 (38.59%) in amount and 68.75% in number, rejected the Plan.
• Class 5 (“General Unsecured Claims”): 17 claim holders, representing $52,671,954.81 (94.30%) in amount and 73.91% in number, voted in favor of the Plan. 6 claims holders, representing $48,003.84 (5.70%) in amount and 26.09% in number, rejected the Plan.

Asset Sale

On November 4, 2020, the Court hearing the Town Sports International cases approved the $84.7mn sale of substantially all of the Debtors’ assets (“Sale”) to New TSI Holdings, Inc. (the “Stalking Horse Bidder”) [Docket No. 639]. The asset purchase agreement (the “APA”) governing the terms of the sale was attached to the Order as Exhibit 1.

The Stalking Horse Bidder is an entity formed by prepetition lenders Tacit Capital LLC (“Tacit”) and an ad hoc group of further prepetition term lenders (the “Ad Hoc Lender Group”) who also together agreed to provide the Debtors with $32.0mn of debtor-in-possession ("DIP") financing.

On October 26th, the Debtors notified the Court that, absent any further qualified bids, they had cancelled a scheduled October 28th auction and designated the Stalking Horse Bidder as the successful bidder. The winning $84.7mn bid includes an $80.0mn credit bid and cash to cover both a $1.0mn recovery pool for general unsecured creditors and wind-down costs. 

Rejection of Plan by Class 4

The Memorandum provides background on the Debtors' failure to win Plan support from Class 4 notwithstanding that members of that class had earlier committed to a Settlement Agreement terms of which included support of the Plan.

The Memorandum provides: “With respect to Class 4 (Prepetition Loan Claims), the Debtors are hopeful that the members of the Term Loan Group will remedy their current breach of their obligations under the Settlement Agreement to support and vote for the Plan. The Term Loan Group actively engaged in the negotiations that led to the recovery to the Committee that is embodied in the Plan and Asset Purchase Agreement, which this Court has already ruled is binding on the Term Loan Group.

The Asset Purchase Agreement specifically provides that consideration from the Purchaser will be set aside for the benefit of unsecured creditors. The Term Loan Group’s failure to abide by the Settlement Agreement may frustrate the orderly wind down of these estates, including the distribution to unsecured creditors previously agreed to by the Term Loan Group. The Court should not allow the Term Loan Group’s refusal to abide by the Settlement Agreement to disrupt the Plan (and the recovery to General Unsecured Creditors contemplated thereby).

To the extent the Term Loan Group does not change its vote, the Debtors intend to seek confirmation of the Plan at all applicable Debtors, including seeking whatever equitable relief may be merited under the circumstances to avoid an inequitable and value destructive outcome to these Chapter 11 Cases. Nonetheless, even if the Court determines that Class 4 voted to reject the Plan, as more fully described below, the Debtors meet the requirements of section 1129(b) of the Bankruptcy Code to “cram down” these rejecting classes.” 

The Court's confirmation order stipulates that no member of class 4 will be bound by the Plan's release provisions unless it "receives its pro rata share of consideration pursuant to the Sale Transaction and as set forth in the Sale Order [unless it has affirmatively opted out of the Plan's release provisions]."

DIP Financing

On November 6, 2020, the Court hearing the Town Sports International cases issued an amended final debtor-in-possession ("DIP") order authorizing the Debtors to access a further $2.8mn of DIP financing per beginning the week ending November 13, 2020 and continuing until the the closing of an asset sale (the "Supplemental DIP Funding")[Docket No. 653].

On October 16th, the Court hearing the Town Sports International cases issued a final DIP order authorizing the Debtors to access the $12.0mn balance of a $32.0mn DIP financing package being provided by Fitness Recovery Holdings, LLC (the “DIP Lender”), that $12.0mn being a third tranche of financing following an initial $15.0mn made available on October 2nd and a further $5.0mn on October 9th.

The DIP Lender is an entity created by Tacit Capital ("Tacit") in collaboration with an ad hoc group of certain other holders under the Debtors' Prepetition Facility (the "Ad Hoc Lender Group"); who have together made an offer to purchase the Debtors' assets and have agreed to serve as a stalking horse bidder in a section 363 auction sale process. The DIP Lender agreed to cap the credit portion of its $84.7mn bid at $80.0mn in respect of amounts owed under the Debtors' prepetition credit facility, but does retain the right to also credit bid amounts outstanding under the DIP financing facility.

The Debtors’ Prepetition Capital Structure

As of the Petition Date, the Debtors’ have approximately $167.2mn in total funded debt obligations. The table below summarizes the Debtors’ prepetition capital structure:

Petition Date Perspective

In a September 4th 10-Q, the Debtors advised that "we currently anticipate that TSI LLC, Holdings II and certain other subsidiaries…may be forced to file a petition for relief under the United States Bankruptcy Code (the 'Bankruptcy Code') in the near future….In the event of such bankruptcy filing, the Company expects that it will need to raise up to approximately $80 million in financing to fund the costs associated with the bankruptcy filing, professional fees in connection with the bankruptcy and to cover operating shortfalls."

Press reports indicate that the $80.0mn figure evolved considerably over the ensuing week, with the funding hole expanding to a reported $200.0mn and leading to a collapse of talks with shareholder Kennedy Lewis Investment Management ("KLM") over a potential injection of $80.0mn of equity financing; with that financing undoubtedly contingent on a willingness of the Debtors' senior lenders to refinance, or extend maturities in respect of, $177.3mn of senior debt that matures on November 15th. The sudden change in financing needs, and KLM's decision to back out of an equity capital injection, suggests that senior lender have refused to accommodate the Debtors in respect of that November debt maturity.  

The Board minutes attached to the Debtors' lead Petition conspicuously omit any reference to agreed debtor-in-possession ("DIP") financing or any agreed stakeholder support.

The Debtors' 10-Q cites the impact of COVID-19 which has ravaged other major players in the U.S. fitness industry and which has compelled the closure of fitness facilities across the United States. Even where clubs have been allowed to re-open; many have faced revenue-limiting restrictions as to member usage. Other recent Chapter 11 filers include Gold’s Gym International Inc. (bought out of bankruptcy by Germany's RSG Group GmbH) and 24 Hour Fitness Worldwide Inc. (filed in June 2020 and still determining Plan trajectory).

Events Leading to the Chapter 11 Filing

TSI Parent's September 4th 10-Q provide [amounts in thousands]: “…recent events relating to the COVID-19 pandemic have had a material adverse effect on the Company’s results of operations, cash flows and liquidity and further contribute to conditions that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Under the terms of the 2013 Term Loan Facility, this is considered an event of default which allows the lenders to call the debt in advance of maturity. On March 13, 2020, the Company borrowed $12,500 from its 2013 Revolving Loan Facility and the Company continues to actively manage its cash flow on a daily basis. 

The Company is facing significant debt maturities in the near term. Our 2013 Revolving Loan Facility expired on August 14, 2020 and our 2013 Term Loan Facility is due to mature on November 15, 2020. Further, the Company is in breach of one of its covenants as of December 31, 2019 and this allows the lenders to call the debt in advance of maturity. As a result of the Company’s failure to repay all amounts outstanding under the 2013 Revolving Loan Facility prior to maturity on August 14 2020, the Company is in breach of the terms associated with this facility. 

If the Company cannot obtain refinancing, the remaining principal balance of the 2013 Term Loan Facility of $177,286 will become payable on November 15, 2020.

On March 16, 2020, the Company was mandated to close approximately 95% of its clubs pursuant to the exercise of emergency executive authority invoked by state and local governments in order to combat the spread of the COVID-19 pandemic. The Florida clubs continued to operate but were closed on March 20, 2020. There is significant uncertainty as to when the clubs will be allowed to re-open and as such, the Company has experienced reduced customer demand, a significant increase in membership terminations and may be unable to recover these members or generate new ones. The Company has taken some immediate steps to reduce operating costs and to conserve cash. The Company informed all non-executive employees working at clubs which have been ordered to close due to the COVID-19 pandemic (as discussed below) that their employment with the Company was terminated with immediate effect. The Company has also ceased paying rent at its club locations that are subject to mandatory closure due to COVID-19.

Due to the impact of the COVID-19 pandemic, the Company was further forced to close eight clubs permanently during the second fiscal quarter of 2020 and expects to permanently close additional clubs during the third fiscal quarter of 2020. Furthermore, re-opening protocols may include restrictions on capacity and activity that make it difficult for us to attract customers and generate revenue. For example, the Governor of New York announced on August 17, 2020 that fitness centers in New York will be permitted to re-open at only 33% capacity and that they must require customers to wear masks indoors at all times. In many cases, state and local governments have not provided a clear timeline for the projected further easing of restrictions, which creates uncertainty for our customers. These developments may further hinder the Company’s ability to generate operating revenue going forward.

Significant Prepetition Shareholders:

The Debtors' lead petition notes a single shareholder of Town Sports International Holdings, Inc. ("TSI Parent") with an ownership interest above the 10% reporting threshold:

• Fitness TSI, LLC (an affiliate of KLM)

In its most recent proxy statement, TSI Parent noted the following key shareholders:

• PW Partners Capital Management LLC: 29.4% (ie Patrick Walsh, the Debtors' CEO and Chairman)
• Kennedy Lewis Investment Management LLC (KLM): 14.1%
• Renaissance Technologies LLC: 6.1%

Key Documents

The First Amended Disclosure Statement attached the following exhibits:

• Exhibit A: Chapter 11 Plan
• Exhibit B: Liquidation Analysis (not clear why this is Exhibit C and not B)

The Debtors filed Plan Supplements at Docket Nos. 706 and 736 which attached the following documents:

• Exhibit A: Rejected Executory Contracts and Unexpired Leases Schedule [Docket No. 706]
• Exhibit B: Assumed Executory Contracts and Unexpired Leases [Docket No. 706] 
• Exhibit C: Schedule of Retained Causes of Action [Docket No. 706]
• Exhibit D: Asset Purchase Agreement [Docket No. 706]
• Exhibit E: Documentation related to the Sale Transactions [Docket No. 706]
• Exhibit F: Non-Released Claims Trustee [Docket No. 706]
• Exhibit G: Non-Released Claims Trust Agreement [Docket No. 736] 

Liquidation Analysis (see Exhibit B of Disclosure Statement [Docket No. 549] for notes)

About the Prepetition Debtors

According to the Debtors: “Town Sports International Holdings, Inc. (the ‘Company” or “TSI.), is a diversified holding company with subsidiaries engaged in a number of business and investment activities. The Company’s largest operating subsidiary, TSI, LLC, has been involved in the fitness industry since 1973 and has grown to become one of the largest owners and operators of fitness clubs in the Northeast region of the United States. TSI’s corporate structure provides flexibility to make investments across a broad spectrum of industries in order to create long-term value for shareholders. Town Sports International is led by its Chief Executive Officer and Chairman of the Board, Patrick Walsh.”

As of December 31, 2019, the Debtors owned and operated 186 fitness clubs and collectively served approximately 605,000 members.

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