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Planet Fitness joins whole business securitization craze

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Planet Fitness is ready to pump up the whole-business securitization market.

The Hampton, N.H.-based health club chain said Monday that it plans to market between $1.23 billion to $1.33 billion of notes secured by franchise and royalty fees as well as a share of profits from its 1,565-store nationwide network.

Planet Fitness Holdings LLC will use the proceeds to refinance more than $707 million in bank loan facilities as well as provide an unspecified cash dividend to shareholders in the publicly held firm (NYSE:PLNT), which has seen its stock price more than double in the last year to $45.70 a share.

The chain’s corporate management will establish the Planet Fitness Master Issuer LLC as a master trust that will initially issue three classes of notes: a $75 million variable-rate Class A-1 tranche with a repayment date of September 2023, plus a pair of floating-rate $575 million Class A-2 notes divided between a four-year and a seven-year tranche.

The $1.15 billion in Class A-2 notes could be upsized to $1.25 billion at closing ($625 million per tranche), Kroll said in a presale report published Monday.

All of the notes carry preliminary triple-B ratings from Kroll and BBB- ratings from S&P Global Ratings, providing a ratings bump from the existing split single-B/double-B ratings by Moody’s and & S&P for its $75 million revolver and term loan B issued at a size of $718 million in 2016.

Planet Fitness Inc. carries a speculative-grade B1 corporate rating from Moody’s.

The transaction marks another sector expansion for the whole-business asset class, which has traditionally been used by operators of quick-service restaurant chains such as TGI Friday’s, Wendy’s and Taco Bell. In the past two years, other retail operators have pushed the boundaries of whole-business outside the dining sector – include the coin-exchange kiosk operator Coinstar and the automotive service center firm Driven Brands.

Planet Fitness’ securitization is the largest whole-business deal year-to-date, and primes an issuance pipeline that through the first two quarters of the year ($2.83 billion) trailed the volume pace in 2017 ($5.1 billion).

Planet Fitness’ new securitization finance vehicle will be structured similar to those in other whole-business deals, in which future franchise and royalty fees paid by franchisees of individual stores will be pledged to the trust to pay down notes. The master trust structure will allow Planet Fitness to regularly market new note issues in subsequent years.

The class A-2 notes will amortization !% a year, and the transaction includes standard cash-trapping and rapid amortization features found in most whole-business securitizations, which are triggered based on the level of debt-to-service coverage ratios on quarterly payment dates.

The transaction has a total debt capacity ratio of 6.9x to securitized net cash flow, which Kroll reports is higher than most recent whole-business deals it has rated (ranging from 5.6x-6.7x). But the leverage ratio is likely to decline because of annual run-rate increases in royalties, which hit 7% in 2017.

Kroll says Planet Fitness’ corporate structure is “less complex” than other franchisors, with most revenue generated by simple monthly membership fees (between $10 and $21.99 a month) that have averaged $2.4 billion the last two years. The company’s use of a third-party payment processor for the membership fees means royalty and fee payment streams can be segregated from franchisee income and funneled directly to the trust vehicle, Kroll noted.

All but 68 of its stores are franchise-owned. The average tenure of franchisees in the Planet Fitness system is a relatively young eight years, Kroll reports, but many of the 160 franchisee groups are larger operators with multiple locations and a diverse geographic footprint. The largest operator owns 86 franchises, for example.

The chain has 11.8 million members who are usually first-time or “occasional” gym users attracted to the gym’s non-intimidating “Judgement-Free Zone” environment, according to Kroll. (Facilities are also equipped with novelty “lunk” alarms that sound when heavy-lifting guests grunt too loudly or throw weights around.)

Besides strength and cardio workout equipment, the facilities also offer massage and tanning beds and chairs (the latter reserved for “black card” members paying higher monthly fees). Franchisees are required to purchase fitness equipment through the company (which negotiates competitive pricing and warranties for the corporate-branded machines), and must replace them every five to seven years.

Most stores are in neighborhood shopping centers, located across high- and low-density markets, Kroll reports.

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Whole business securitization