DELOITTE INSOLVENCY experts have been recruited to rescue struggling gym chain LA Fitness and LA Leisure.
Partners Matt Smith and Neville Kahn (pictured) have been appointed nominees to supervise the Company Voluntary Arrangement (CVA) of the UK gym chain LA Fitness and LA Leisure which has 80 properties including gyms and head office.
A CVA is a rescue deal that usually runs for two to five years and must be voted for by 75% of creditors, by value of debt, to vote in favour of the proposals. Once approved the CVA is supervised by licensed insolvency practitioners for the lifetime of the proposal.
Kahn and Smith have proposed that out of the 80 properties: 31, including the Doncaster head office, will pay rent monthly rather than quarterly for two years; seven will pay 60% less rent monthly for two years; and management are seeking new operators for 33 gyms with a 45% reduction in rent. However, nine gyms do not form part of the CVA proposals.
The management has also arranged for new bank funding of £40m, this includes future investment across the portfolio and represents a £90m reduction in the company’s secured debt obligations. Also, following the restructuring, the group will be released from £159m of secured loan notes.
Creditors are due to vote on the proposals on 24 March, with the supervisors claiming that should the CVA fail it is very likely the business will enter administration.
Smith said: “The proposed CVAs will allow the group to revise lease terms and proceed with its wider restructuring plan. The proposals put forward offer the best possible solution for the group and all of its stakeholders.
“We believe that the CVA proposals offer a much better outcome for all creditors, including the landlords impacted by the proposed restructuring, than they would receive in administration.”
As part of the deal, landlords and lease guarantees will benefit from any future trading upside.
A statement from the British Property Federation (BPF) said: “We would rather have a discussion than something that is just sprung on landlords. The fact that Deloitte were willing to have such discussions is welcome and should result in a better proposal for landlord creditors than if they had not taken place.
“Allowing compromised landlords to participate in any trading upside for example, is something we have long advocated as a basic fairness in such circumstances”.
The CVA and restructuring should not affect the day-to-day running of any of the gym sites.
In June 2012 KPMG arranged a CVA for Fitness First, which had 150 sites and £600m of debt with the company still going strong.
In that deal the company retained 62 gyms and transferred 67 to other operators. Out of its portfolio 57 gyms were due to pay rent monthly rather than quarterly with many paying reduced rent. There was also a clawback cause for landlords to share in any future financial success from the company.
Kahn has previously worked on high profile cases such as the administration of HMV, Comet, Blockbuster and Woolworths.
LA Fitness CEO Martin Strong said that it is a “structural issue that is hampering” the business and but he hopes to create a leaner more efficient company.
“Importantly, we will have the financial strength and operational flexibility to continue investing in facilities, equipment and technology across our retained portfolio of clubs to enhance the experience for our members,” he added.