CHICAGO — A $280 million loan lifted some pressure off the shoulders of Bally Total Fitness, which was in danger of defaulting on its debt next April. Five lenders — JP Morgan Chase Bank, JP Morgan Securities Inc., Morgan Stanley, Canyon Capital Advisors LLC and Goldman Sachs Credit Partners LP — loaned the fitness operator the funds. The financing, which consists of a term loan and a revolver, will be used to refinance its existing credit facility, fund capital spending and provide additional liquidity, says Kim Noland, director of high-yield research at Gimme Credit, a research firm on corporate bonds.

Bally was required to refinance its high-yield bonds by April of next year or face the early maturity of the existing credit facility, Noland says. If Bally hadn't gotten the loan and had defaulted on its debt, its debtholders would have had the right to force various actions, including making Bally file for Chapter 11, sell clubs or inject equity that would have allowed the debt to be paid off, says Rick Caro, president of Management Vision.

“It would have led to a pressurized situation to do something that would have made sure that those debtholders were paid their monies in full,” he says. “They may have been pressured to find a solution that was less attractive as they got closer to April 2007 and might have provided fewer options than what they have today.”

The loan helped Bally to stave off a last-minute pressure to meet deadlines, but the company still needs to deal with the senior subordinated debt that is due in October 2007, Caro says.

“As excited as we are about this preliminary step to turn this ship in a different direction, we are still hoping to hear of long-term solutions of how they'll run the business,” Caro says.

Caro questions whether Bally will invest in additional clubs in markets where the company already has market share or introduce a revised business model going forward.

“We're still concerned about how they are going to build their business so they have some stronger cash flow and so the business can be more self sustaining,” Caro says.

To get back on the right financial track, Bally needs a major influx of money that it can invest in its existing clubs, Caro says.

“The clubs all need a functional, updated decor and not just add a few treadmills,” he says. “They should all be working facilities with up-to-date equipment, and it wasn't possible with the kind of resources they had before. It may not be possible unless they get an injection of resources beyond the day-to-day.”

The chain also needs to sell off underperforming clubs to reduce some of the corporate overhead and tighten the business, Caro says. To raise net proceeds, Bally recently generated $10 million from the sale and leaseback of four of its clubs. The transaction, which closed on Oct. 20, provided an additional liquidity cushion for the fitness chain, according to a statement from the company.

Bally is also reducing the size of its board of directors from nine to five members. The company will not nominate Steven Rogers for reelection when his term expires, and interim chairman Don Kornstein, a Class III director, will be nominated for a three-year term as a Class I director at Bally's 2007 annual shareholder meeting.

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