KPMG secures rescue deal at Fitness First

by Rachael Singh

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21 Jun 2012

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Richard Fleming

KPMG INSOLVENCY PROFESSIONALS have managed to secure a rescue package at struggling gym chain Fitness First.

Earlier this month, KPMG insolvency practitioners (IPs) drew up a range proposals to rescue the company which is reported to have a £600m debt and about 150 sites.

Fitness First has operations in the UK and 15 international markets. However, the Company Voluntary Arrangement (CVA) will only affect the UK business. As part of the CVA, the company will walk away from about 67 of its gym sites.

In order for a CVA to be approved, 75% of creditors, by value of debt, need to vote in favour of the proposals.

Unsecured creditors, such as the taxman and landlords, are likely to see returns of about 25 - 35p for every pound owed.

Richard Fleming (pictured), UK head of restructuring at KPMG and supervisor of the CVA, said:
"Today's vote in favour of the CVA proposal not only addresses Fitness First's operational issues around its property portfolio but also enables the wider financial restructuring and injection of fresh capital to take place, which were dependent on the CVA's approval.

"A company can only propose a CVA when the alternative is administration and it must offer a better return to creditors. The Fitness First CVA is estimated to generate a return of 25-35p in the £1 for the landlords, versus less than 1p in the £1 in an administration."

As part of the CVA, Fitness First will retain 62 gyms and transfer 67 to other operators during the next six months. Those 67 sites will see their rent reduced 55% for six months, during the transfer process. An identical compromise is to be applied to 14 head leases of premises which have been sublet to other operators and to 8 leases of vacant sites.

A total of 57 gyms will pay its rent monthly instead of quarterly for three years. A further 5 sites will pay a 65% reduced monthly rent for three years, before reverting to market-based rent for the remainder of the lease term.

There is a clawback clause in the CVA which will allow landlords to share in the turnaround of the business.

Earlier this month the British Property Federation said it welcomed the claw-back clause included in the proposals.

Liz Peace, chief executive of the British Property Federation, said prior to the CVA vote: "It is extremely welcome to see a ‘claw-back' arrangement included in this CVA and we hope that this further establishes a precedent that the use of these provisions should be included as a matter of course in future CVAs.

"It is only fair, should creditors accept the CVA, that having taken a financial hit and allowed Fitness First to avoid administration landlords' shareholders, many of whom are pensioners, are compensated if the company returns to health."

KPMG restructuring partner Brian Green will also supervise the CVA alongside Fleming.

At the time of the CVA announcement, newly appointed Fitness First CEO Andy Cosslett said: "We have worked hard with KPMG to put in place a CVA structure which will allow us to renegotiate leases at sites in the UK where current rent levels are unsustainable. At the same time, we are selling clubs which no longer fit into our future vision for Fitness First. Employees' jobs will be protected as far as possible.

"This announcement is a major part of the restructuring of the global Fitness First group, which will see us emerge as a company that is largely debt-free and with the necessary financial firepower to develop the brand and secure it as one of the world's leading health and fitness operators."

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