Peloton avoids liquidity crisis in global refinancing

Platoon No longer facing an imminent liquidity crisis after a massive debt refinancing, the company still has a long road ahead 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 facility from JP Morgan and Goldman Sachs. All of these payments are due in 2029.

The refinancing reduced Peloton's debt from about $1.75 billion to about $1.55 billion and delayed looming maturity dates on loans it likely would not have had the cash to pay.

Before the refinancing, Peloton would have had to pay off about $800 million of its debt by November 2025. If it managed to pay that amount, it would have to pay off about $200 million more in about three more months. The term loan was due to mature in May 2027.

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

Now that it has refinanced, Peloton has alleviated investors' concerns about liquidity and has the wiggle room it needs to try to turn its business around.

The fact that it was able to secure these loans indicates that investors believe in its ability to right-size its business and eventually pay them back, restructuring experts told CNBC.

“This refinancing puts us now in a much better position for sustainable, profitable growth and a much stronger financial footing than we were before, and our investors saw that,” CFO 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. So it was a huge vote of confidence for the future of Peloton.”

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

Coddington acknowledged to CNBC that the increase in 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 expected annual expenses by more than $200 million.

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

“The cost-cutting plan made us feel a lot more comfortable with that,” Coddington said.

While Peloton insists that 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 largest 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 sit near the top of the capital structure. If Peloton is unable to turn its business around and ends up in a position where it considers filing for bankruptcy or filing for bankruptcy, its creditors would be in a strong position to take control of the company.

“I would describe this refinancing and recapitalization as an opportunistic move,” said Evan DuFaux, a special situations analyst at CreditSights and an expert on distressed debt. “I think it's a smart, opportunistic and somewhat complicated move.”

Silver Point declined to comment. Soros did not respond to 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 Covid-19 pandemic ended and figure out what kind of business it will be going forward.

“It's an exercise in postponing the problem because refinancing itself buys time, but it doesn't actually solve any of Peloton's underlying problems,” said Neil Saunders, chief executive of GlobalData Retail. “They're very different problems to refinancing.”

Following the departure of former CEO Barry McCarthy and with two board members, Karen Boone and Chris Bruzzo, now in charge, Peloton needs to decide: Is it a content company, like the Netflix Are you a fitness company or a hardware company that needs to develop new strategies to sell your expensive equipment?

So far, the strategy of combining both concepts has proven 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 to move forward without losing the great brand equity that they still have today, especially with the loyal following that they have,” said Scott Stuart, executive director of the Turnaround Management Association and an expert on corporate turnarounds.

“Money doesn't fix everything, and the problem is that the more money you take and the more you refinance… the more problematic it becomes,” he added.

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

He noted that the company generates about $1.6 billion in high-margin recurring revenue from subscriptions and makes 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 profits?” Siegel said. “Well, you take all that gross profits and spend it to try to find new growth.”

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

“Their debt is alarming for a company that's burning cash, but it's not alarming at all for a company that can generate $500 million 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 back off its growth strategy. Peloton founder John Foley set a goal of growing to 100 million members, and McCarthy embraced that target when he took over. As of the end of 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 quiet about its strategy. It said it is looking for a new permanent CEO and that the person it hires will offer clues about the company’s direction.

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

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

“We'll continue to create social content and launch new classes,” Peloton's chief content officer Jen Cotter told CNBC. “I think we'll just use the mental space that would have been dedicated to live classes that day to come up with new programs, new ways to distribute wellness content, new business categories to work on, like nutrition and rest and sleep, which we haven't really delved into as much as we plan to.”

He added that the change will save the company some money, but it is more 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 in its attempt 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 TVs in their hotel rooms at about 400 locations. The shift in hours will allow staff to be available to create content for projects like the Hyatt partnership.

The change comes after three Peloton trainers (Kristin McGee, Kendall Toole, and Ross Rayburn) decided not to renew their contracts with the company. The news sparked concern among Peloton's die-hard fans, as trainers, one of its core assets, were leaving the company 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 of the instructors were offered contracts and I mean it when I say that we have a deep respect and appreciation for what they've brought to the table and if they want to try something new, that's fine,” Cotter said.

“Even though we're going to miss them a lot, we're like a professional sports team,” he added. “Athletes leave the team and you still love them and you still love the team, so we really hope that this change will allow our members to understand that this is OK and yes, we're going to miss them, but yes, it's OK for people to try other things.”

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

It's possible that some instructors are teaching fewer classes as part of the reduction in live content. It's unclear whether some instructors suffered pay cuts as a result, or whether McGee, Toole and Rayburn left due to disagreements over pay.

When asked, Cotter declined to answer.