Peloton’s tricky refinancing winds through loan and CB markets

IFR 2535 - 25 May 2024 - 31 May 2024
5 min read
Stephen Lacey, Madeline Fixler , Michelle Sierra

Peloton Interactive, the once high-flying online fitness company, has been forced into the humbling position of refinancing its entire capital structure including new high-cost bank loans to fund the takeout of problematic convertible bonds.

The refinancing was safety first, and entirely contingent upon buying back enough of the zero-coupon five-year CB issued in early 2021 at the height of the pandemic when stay-at-home fitness was fashionable and money was cheap.

Peloton sequenced the refinancing with a US$300m 5.5-year senior unsecured CB on Tuesday and a US$1bn five-year secured term loan B syndicated on Wednesday and Thursday.

As a condition of closing the loan, Peloton was required to repurchase at least US$800m of the 2026 CB and reduce the outstanding amount to US$200m.

JP Morgan and Goldman Sachs were lead banks on the financing. BDT & MSD Advisors, which began life as Michael Dell’s family office, was adviser. JP Morgan was lead-left arranger on the loan with Goldman Sachs as bookrunner.

The banks priced the CB at a coupon of 5.5% and conversion premium of 40% after one day of marketing and the loan finalised at SOFR plus 600bp with a 99 OID. They were able to slightly upsize the CB from US$275m and increase the OID from 98–98.5. There is a 50bp margin step-down on the loan at first-lien net leverage less than five times.

Regardless, these are high-cost securities.

“The fact that they were able to get this refinancing done is indicative of a hot market,” one loan investor said. “This is a company that has never generated any earnings and has burnt through a tremendous amount of cash.”

Peloton’s shares skidded 16.4% on Tuesday to US$3.27, narrowing its market capitalisation to US$1.2bn and setting the conversion price on the new CB at US$4.58.

The 11.3% rate on the TLB is among the highest this year on a syndicated loan by a US corporate, according to LPC data.

At its pinnacle in 2021, Peloton had a market cap of US$170bn, making the US$1bn raised in February that year via a zero-coupon CB seemingly insignificant, even with a record 65% premium.

With a conversion price of US$239.23, the certain redemption of the CB was problematic for the now cash-poor company.

“There was huge overhang on the stock,” said an equity-linked banker. “With this refinancing out of the way, Peloton management can now focus on execution.”

Peloton’s refreshed top-heavy capital structure leaves it with about US$725m of liquidity, including US$100m on a new revolving credit facility, according to IFR calculations.

Hors categorie

Peloton’s road to recovery is difficult.

In the fiscal third quarter to March 31, Peloton eked out a positive free cashflow of US$8.6m, its first positive on this measure since late 2020. The company said this month it was laying off 15% of its workforce in a move to enhance profitability by reducing expenses by US$200m.

Peloton CEO Barry McCarthy also agreed to step down, less than two years after taking over from founder John Foley. Board members Karen Boone and Chris Bruzzo were installed as interim CEOs.

Those costs reductions are designed to achieve “meaningful” free cashflow in fiscal 2025.

“We do expect to have both positive and negative quarters within the year due to working capital impacts from timing of inventory purchases and seasonality of marketing spend,” said CFO Elizabeth Coddington on the third-quarter earnings call on May 2.

Peloton’s operational recovery hinges on stemming subscriber losses and funnelling users from bikes to rowing, running and other products. The company finished the quarter with 3.1m subscribers to its connected fitness service and 675,000 to its paid app service, essentially unchanged on the former but a 21% decline on the latter from year-earlier levels.

While subscriptions held steady, Peloton’s sales of new equipment fell by 14% to US$279.9m.

Peloton has also kicked the tires on selling itself to a private equity firm, CNBC reported this month.

With the refinancing behind it, Peloton is in a better position to sell itself. Making a sale more likely, Peloton’s legacy Class B shareholders now own just a 4.9% economic stake, giving them a slim majority in matters of corporate governance with their 20-for-1 voting rights.

What once was a growth equity story has shifted gears to where bank lenders are in control.