The US leisure and entertainment institutional leveraged loan default rate could approach 30% in 2021, compared with 9.9% in 2020 and 32.8% following the Great Recession in 2009, due to persistent pandemic-driven operating and liquidity challenges, says Fitch Ratings. Leisure and entertainment could account for roughly 25% of all leveraged loan defaults, despite improving access to capital.
Volume on Fitch’s Top Loans of Concern (LOC) list totals $39 billion, with leisure/entertainment representing $12 billion, or 31%, and nearly double the next highest sector. Cineworld Cinemas, Travelport, AMC Entertainment and Equinox are prominent on Fitch’s LOC list. AMC, the largest movie theater company in the world, issued $646 million of debt and equity at the end of January. The company believes the increased liquidity extends its financial runway deep into 2021.
The near-term operating environment for movie theaters remains challenged, as public-health mobility curtailments result in extended theatre closures. Movie studios are unable to widely release costly finished content, and have adjusted distribution models by delaying theatrical release dates, simultaneously releasing movies on streaming services and in theaters or releasing movies only via direct-to-consumer streaming.
We expect movie theaters’ sales to benefit from pent-up demand when curtailments end. Attendance at theaters that reopened after the first wave of coronavirus infections was strong despite social distancing. The theatric release model may sustain permanent structural changes due to penetration of subscription video-on-demand services provided by media companies that own studios, including Walt Disney with Disney+ and AT&T/Warner Media with HBO Max.
The fitness industry has liquidity challenges with bifurcated operating performance across segments. Budget gyms are outperforming boutique operators, especially those without membership models and those concentrated in dense, urban locations. Geographically concentrated operators in states with more stringent operating restrictions are underperforming geographically diverse franchises.
We expect budget gyms to gain market share through the fitness industry’s recovery due to their value proposition and the potential for weak performing mid-priced and boutique gyms to permanently close. Same-store revenue for budget gyms is projected to be down 10% in 2021 relative to 2019, recovering to pre-pandemic levels by 2022.
Class-only boutique operators may be secularly challenged, given cannibalization from lower-priced alternatives, like Planet Fitness, and the success of at-home fitness concepts during the pandemic. Revenue declines could remain severe through 2021, with over 50% declines relative to 2019, due to these challenges and local capacity restrictions.
