Peloton avoids liquidity crisis in global refinancing

The peloton no longer faces an immediate liquidity crisis following a massive debt refinancing, but the company still has a long way to go to fix its business and return to profitability.

In late May, the connected fitness company secured a new $1 billion term loan, raised $350 million in senior convertible notes and obtained a new $100 million credit line from JP Morgan and Goldman Sachs. All of them should be in 2029.

The refinancing reduced Peloton’s debt from about $1.75 billion to about $1.55 billion and pushed back the looming maturities of loans it likely didn’t have the cash to pay.

Before the refinancing, Peloton would have had to pay down about $800 million of its debt by November 2025. If it were to pay that down, another $200 million would be due about three months later . The term loan would have ended in May 2027.

For Peloton, which hasn’t made a net profit since December 2020 and has seen sales decline for nine consecutive quarters, the debt pile posed an existential threat and fueled investor concerns about a possible bankruptcy.

Now that it has refinanced, Peloton has eased investors’ concerns about liquidity and has the breathing space it needs to try to turn its business around.

The fact that she was able to secure these loans signals that investors believe in her ability to right her business and eventually turn them around, restructuring experts told CNBC.

“This refinancing is now putting us in a much better position for sustainable, profitable growth and just a much stronger financial footing than where we were before, and our investors saw that,” chief financial officer Liz Coddington told CNBC in an interview. “I think they believe in the story. They believe in what we’re trying to do, as we do, and in transforming the business. And so it was just a big vote of confidence in the future of Peloton.”

While the refinancing may have bought Peloton some time, it’s far from a panacea. Under the terms, Peloton will now spend about $133 million a year in interest, up from about $89 million previously. This will make Peloton’s efforts to sustain positive free cash flow more difficult.

Coddington acknowledged to CNBC that higher interest expenses will “impact” free cash flow, but said that’s partly why the company began cutting costs in early May. The plan is expected to reduce annual spending by more than $200 million.

Even with the higher interest payments, Coddington expects the company will be able to maintain positive free cash flow without having the business “grow materially in the near term.”

“The cost reduction plan made us much more comfortable with that,” Coddington said.

While Peloton insists investors bought into its refinancing because they believe in its strategy, some may be trying to put themselves in a better position if the company fails.

Two of Peloton’s biggest debt holders, Soros Fund Management and Silver Point Capital, are known to sometimes invest in distressed companies. Since the Peloton loans they invested in are secured, they are near the top of the capital structure. If Peloton can’t turn its business around and ends up in a position where it is considering or filing for bankruptcy, its creditors would be in a strong position to take control of the company.

“I would describe this reduction in refinancing refinancing as kind of opportunistic,” said Evan DuFaux, a special situations analyst at CreditSights and an expert in distressed debt. “I think it’s just kind of a smart, opportunistic, tricky move.”

Silver Point declined to comment. Soros did not return a request for comment.

Peloton is in a much better cash position than it was a few months ago, but the company still needs to address the demand issues that have plagued it since the end of the Covid-19 pandemic and figure out what kind of business it will be in. the future.

“It’s really an exercise in kicking the can because the refinancing itself buys time but doesn’t actually solve any of the underlying problems in Peloton,” said Neil Saunders, managing director of GlobalData Retail. “These are very different issues for refinancing.”

After the departure of former CEO Barry McCarthy and with two board members, Karen Boone and Chris Bruzzo, now at the helm, Peloton must decide: is it a content company, as Netflix for fitness, or is it a hardware company that needs to develop new strategies to sell its expensive equipment?

So far, the clash with both has proved unsuccessful.

“They’re going to have to make some decisions about what parts of the model can survive, what parts can’t, or things they can do moving forward without losing the great brand value they still have right now, especially with loyalists.” after that they have,” said Scott Stuart, CEO of the Turnaround Management Association and an expert in corporate restructuring.

“Money doesn’t fix everything, and the issue becomes the more money you get and the more you refinance … the more problematic it becomes,” he added.

Simeon Siegel, a retail analyst for BMO Capital Markets, said Peloton can start addressing its issues by forgetting about trying to grow the business for now and instead focus on “bear hugging” the brand’s millions of loyalists. his.

He noted that the company makes about $1.6 billion in recurring revenue from high-margin subscriptions and sees more than $1.1 billion in gross profit from that side of the business.

“The problem is they lose money. How can you lose money if you generate a billion dollars in recurring gross profit?” Siegel said. “Well, you take all that gross profit and spend it to try and pursue new growth.”

He said Peloton could generate about $500 million in EBITDA if it cuts research and development, marketing and other corporate expenses. For example, Peloton’s marketing budget is about 25% of annual sales, and if the company reduced that to 10%, it would still be at the “high end of most brands,” Siegel said.

“Their debt is scary for a company that’s burning cash, their debt is not scary at all for a company that can do half a billion dollars in EBITDA,” he said. “They have a business that generates a huge amount of money. They need to stop their spending.”

In May, Peloton announced it would cut 15% of its corporate workforce, but it may be more reluctant to back away from its growth strategy. Peloton founder John Foley set a goal of growing to 100 million members, and McCarthy adopted the goal when he took over. As of the end of March, Peloton had about 6.6 million members — woefully behind that long-term goal.

Since the company announced its cost-cutting plan, McCarthy’s departure and another disastrous earnings report in early May, Peloton has been largely mum on its strategy. He said he is looking for a new permanent CEO and the person he hires will provide input on running the company.

If you hire another “hyper growth tech CEO” like McCarthy – who had worked at Netflix and Spotify – then Peloton will likely face the same issues, Siegel said. But if it affects someone else, it could signal a change in strategy.

One notable difference at Peloton is its schedule of live programming. The company currently offers live streaming classes from its New York studio seven days a week, but starting Wednesday, that will change to six. Last month, her London studio went from seven days of live streaming classes to five.

“We’re all going to continue to create, create social content, drop new classes,” Peloton chief content officer Jen Cotter told CNBC. “I think we’re just going to use the brain space that would have been spent in live classes back in the day to create new programs, new ways to deliver wellness content, new business categories to go into, like food and rest and sleep, which we haven’t really done as deeply as we plan to do.”

She added that the change will save the company some money, but is more of an opportunity to make better use of its production staff than a cost-cutting measure.

For example, the company in May merged with Hyatt Hotels as it tries to generate new revenue and diversify revenue streams. As part of the deal, hundreds of Hyatt properties will be equipped with Peloton equipment, and guests will have access to personalized Peloton classes on their hotel room televisions in approximately 400 locations. The schedule adjustment will allow staff to be available to create content for projects like the Hyatt partnership.

The change comes after three Peloton coaches – Kristin McGee, Kendall Toole and Ross Rayburn – decided not to renew their contracts with the company. The news raised concerns among Peloton’s rabid fan base that coaches, one of its main assets, were leaving in droves.

Cotter insisted the split was amicable – and the door is open if the athletes want to return.

“All I can say is that they decided they wanted to leave. All the instructors were offered contracts, and I mean it when I say that we have deep respect and appreciation for what they’ve contributed, and if they want to try something new, that’s okay,” Cotter said.

“As much as we will miss them, we are like a professional sports team,” she added. “Athletes leave the team and you still love the athlete and you still love the team and so we hope that this change will allow our members to understand that that’s OK, and yes, we will miss them, but yes , it’s okay for people to go try other things.”

McGee, Toole and Rayburn all left when Peloton was in the process of renewing coaches’ contracts.

Some instructors may teach fewer classes as part of the withdrawal of live content. It’s unclear if any instructors took pay cuts as a result, or if McGee, Toole and Rayburn left because of compensation disputes.

When asked, Cotter declined to answer.