Peloton avoids liquidity crunch in global refinancing

Platoon no longer faces a looming liquidity crisis after 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 convertible senior notes and received a new $100 million credit line from JP Morgan and Goldman Sachs. All of them mature in 2029.

The refinancing reduced Peloton’s debt from about $1.75 billion to about $1.55 billion and postponed looming maturity dates on loans it likely wouldn’t have had the money to repay.

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

For Peloton, which has not posted a net profit since December 2020 and has seen sales decline for nine straight quarters, the debt posed an existential threat and fueled investor concerns about a possible bankruptcy.

Now that it has been refinanced, Peloton has eased investor concerns about liquidity and has the breathing room it needs to try to turn its business around.

The fact that it was able to secure these loans signals that investors believe in its ability to turn around its business and eventually pay them back, restructuring experts told CNBC.

“This refinancing now puts us in a much better position for sustainable, profitable growth and just a much stronger financial foundation 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 do we, and the transformation of the business. And so it was just a huge vote of confidence for 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 annually on interest, up from about $89 million previously. That will make Peloton’s efforts to sustain positive free cash flow more difficult.

Coddington acknowledged to CNBC that the higher interest expense 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 run-rate expenses by more than $200 million.

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

“The cost reduction plan made us a lot 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 goes bankrupt.

Two of Peloton’s biggest debt holders, Soros Fund Management and Silver Point Capital, are known for sometimes investing in distressed companies. Because the Peloton loans they invested in are secured, they are near the top of the capital structure. If Peloton fails to turn the 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 refinancing/recapitalization as an opportunistic move,” said Evan DuFaux, a special situations analyst at CreditSights who specializes in distressed debt. “I think it’s just a smart, opportunistic and kind of complicated move.”

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

Peloton is in much better financial shape 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 postponing the issue because the refinancing itself buys time but it doesn’t solve any of the underlying issues at Peloton,” said Neil Saunders, managing director of GlobalData Retail. “Those are very different issues to the refinancing.”

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

So far, trying to reconcile the two sides has not yielded results.

“They’re going to have to make some decisions about what parts of the model are survivors, what parts aren’t, or things they can do to move forward without losing the great brand equity they still have today, especially with the loyal following they have,” said Scott Stuart, CEO of the Turnaround Management Association and an expert on corporate turnarounds.

“Money doesn’t solve everything, and the problem becomes the more money you take out and the more you refinance… the more problematic it becomes,” he added.

Simeon Siegel, a retail analyst at BMO Capital Markets, said Peloton could start to solve its problems by forgetting about trying to grow the business for now and instead focusing on “embracing” its millions of loyal brand followers.

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

“The problem is they lose money. How do you lose money if you’re generating a billion dollars of recurring gross profit?” Siegel said. “Well, you take all that gross profit and spend it to try to chase new growth.”

He said Peloton could generate about $500 million in EBITDA if it cut R&D, marketing and other corporate expenses. For example, Peloton’s marketing budget is about 25% of annual sales, and if the company reduced it to even 10%, it would still be in the “upper echelon of most brands,” Siegel said.

“Their debt is scary for a company that’s burning cash, their debt is not scary for a company that can do half a billion dollars of EBITDA,” he said. “They have a business that’s generating a tremendous amount of cash. They need to stop burning it.”

In May, Peloton announced it would cut 15% of its corporate workforce, but it may be more reluctant to backtrack on its growth strategy. Peloton founder John Foley set a goal of growing to 100 million members, and McCarthy embraced the goal when he took over. As of late March, Peloton had about 6.6 million members — woefully short of 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 tight-lipped about its strategy. It has said it is searching for a new permanent CEO, and the person it hires will offer clues about the company’s direction.

If you hire another “hypergrowth tech CEO” like McCarthy – who worked at Netflix and Spotify — then Peloton will likely face the same problems, Siegel said. But if it chooses someone different, it could signal a shift in strategy.

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

“We’re all still going to be creating, creating social content, launching new classes,” Peloton’s chief content officer Jen Cotter told CNBC. “I think we’re just going to be using the brain space that would have been spent on live classes that day to create new programs, new ways to distribute wellness content, new business categories to get into like nutrition, rest and sleep, which we haven’t done as deeply as we planned to do.”

She added that the move 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, in May, the company partnered with Hyatt Hotels as it looks to generate new revenue and diversify revenue streams. As part of the deal, hundreds of Hyatt properties will be outfitted with Peloton equipment, and guests will have access to personalized Peloton classes on their hotel room TVs at about 400 locations. The schedule adjustment will allow staff to be available to make content for projects like the Hyatt partnership.

The move comes after three Peloton trainers — 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 trainers, one of its key assets, were leaving in droves.

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

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

“As much as we miss them, we’re 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’re really hopeful that this change allows our members to understand that this is acceptable, and yes, we’ll miss them, but yes, it’s acceptable for people to try other things.”

McGee, Toole and Rayburn left as Peloton was in the process of renewing trainer contracts.

Some instructors may be teaching fewer classes as part of the live content pullback. It’s unclear whether any instructors have taken pay cuts as a result, or whether McGee, Toole and Rayburn left because of disagreements over pay.

When questioned, Cotter declined to answer.