Peloton averts liquidity crisis with global refinancing

Peloton The company no longer faces an imminent liquidity crisis thanks to a massive debt refinancing, but it still has a long way to go to turn its business around and return to profitability.

In late May, the connected fitness company secured a new $1 billion long-term loan, raised $350 million in convertible notes, and inked a new $100 million line of credit from JPMorgan and Goldman Sachs, all of which mature in 2029.

The refinancing reduced Peloton’s debt from about $1.75 billion to about $1.55 billion and extended the maturities of loans that it would otherwise be unable to repay.

Before the refinancing, Peloton had about $800 million in debt due to be paid off by November 2025. If it could pay that off, another roughly $200 million was due about three months later. The term loans were due in May 2027.

For Peloton, which hasn’t made a net profit since December 2020 and has seen nine consecutive quarters of declining sales, the debt mountain poses an existential threat and has intensified investor concerns about possible bankruptcy.

Peloton’s refinancing has eased investor concerns about its liquidity and given it the breathing space it needs to turn around its business.

The fact that the company was able to secure these loans shows that investors have faith in the company’s ability to right-size its business and ultimately repay its debt, restructuring experts told CNBC.

“This refinancing puts us in a position to have much more stable, profitable growth and a much stronger financial footing than we had before, and our investors saw that,” Chief Financial Officer Liz Coddington said in an interview with CNBC. “I think they believe in our story. They believe, as much as we do, in what we’re trying to do and the transformation of the business. So this was a huge show of confidence in the future of Peloton.”

The refinancing may have bought Peloton some time, but it’s far from a panacea: Under the terms, Peloton will now pay roughly $133 million a year in interest, up from roughly $89 million a year before. This will make Peloton’s efforts to maintain positive free cash flow more difficult.

Coddington acknowledged to CNBC that higher interest expenses will have an “impact” on free cash flow, but said that’s part of the reason the company began cutting costs in early May, a plan expected to reduce annual run-rate expenses by more than $200 million.

Coddington said he expects the company will be able to maintain positive free cash flow even with higher interest payments without “significantly expanding its operations in the near term.”

“The cost-savings plan has given us more peace of mind on that,” Coddington said.

Peloton argues that investors invested in the refinancing because they believe in its strategy, but some may be trying to put themselves in a better position if the company goes bankrupt.

Two of Peloton’s largest bondholders, Soros Fund Management and Silver Point Capital, are known for sometimes investing in troubled companies. The Peloton loans they invested in are secured, which puts them high in the capital structure, putting creditors in a strong position to take control of the company if it can’t turn things around and has to consider or file for bankruptcy.

“I would say this refinancing and recapitalization is kind of opportunistic,” said Evan Dufour, a special situations analyst and distressed loan expert at CreditSights. “I think this is kind of a smart, opportunistic, kind of a smart move.”

SilverPoint declined to comment, and Soros did not respond to a request for comment.

While Peloton’s cash position is much better than it was a few months ago, the company still needs to address demand issues that have plagued it since the end of COVID-19 and figure out what its business will look like going forward.

“The refinancing itself buys time, but it really is a postponement move because it doesn’t actually solve Peloton’s underlying issues,” said Neil Saunders, managing director at GlobalData Retail. “These are completely separate issues from the refinancing.”

With former CEO Barry McCarthy stepping down and now led by directors Karen Boone and Chris Bruzzo, Peloton is facing a decision on its next move. Netflix Are you a company that sells fitness equipment or a hardware company that needs to develop new strategies to sell expensive equipment?

So far, straddling the two has proven unsuccessful.

“Companies are going to have to make some decisions about which parts of their model can survive and which parts can’t, or what they can do to move forward without losing the great brand value they still have, especially with a loyal following,” said Scott Stewart, CEO of the Turnaround Management Institute and a corporate restructuring expert.

“Money doesn’t solve everything. The more you borrow and the more you refinance, the worse the problem becomes,” he added.

Simeon Siegel, a retail analyst at BMO Capital Markets, said Peloton can begin to address its problems by forgetting about expansion efforts for now and focusing instead on “embracing” its millions of brand-loyal customers.

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

“The problem is they’re losing money. How can they be losing money when they’re generating $1 billion in recurring gross profits? And they’re using all of that gross profit to pursue new growth.”

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

“For a company that’s burning cash, their debt is scary, but for a company that can make $500 million in EBITDA, their debt is not scary at all,” he said. “They have a business that’s generating a ton of cash. They need to stop spending.”

Peloton said in May it was cutting 15% of its workforce, but it may be reluctant to back away from its growth strategy. Peloton founder John Foley set a goal of 100 million members, a goal McCarthy adopted when he took over. As of the end of March, Peloton had about 6.6 million members, far short of its long-term goal.

Peloton has been largely silent about its strategy since announcing cost-cutting plans, McCarthy’s departure, and another dismal earnings report in early May. The company has said it is searching for a new permanent CEO, and who it hires will likely offer a hint about the company’s direction.

Netflix and Spotify If that happens, Peloton would likely face the same problems, Siegel said, but partnering with another company could signal a shift in strategy.

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

“We’re going to continue to be creative with social content and launching new classes,” Peloton’s chief content officer Jen Cotter told CNBC. “I think we’re going to use the brain space that we would have spent on live classes in the day to come up with new programming, new ways to deliver wellness content, new areas of the business that we haven’t dived into as deeply as we had planned, like nutrition and rest and sleep.”

She added that while the change will save the company some money, it is more an opportunity to make better use of production staff than a cost-cutting measure.

For example, the company partnered with Hyatt Hotels in May to generate new revenue streams and diversify its income streams. As part of the deal, Peloton equipment will be installed in hundreds of Hyatt properties, allowing guests to watch custom Peloton classes on TVs in about 400 hotel rooms. Schedules will be adjusted to free up staff to create content for projects like the Hyatt partnership.

The change in policy came after three Peloton trainers — Christine McGehee, Kendall Touré and Ross Rayburn — decided not to renew their contracts with the company, news that raised concerns among Peloton enthusiasts that one of the company’s core assets, its trainers, was being exodus in large numbers.

Cotter insisted the parting was amicable and that the door was open for players to return if they wished.

“All I can say is they decided they wanted to leave. All of our instructors were offered contracts and we have a lot of respect and gratitude for their contributions. If they want to try something new, that’s fine,” Cotter said.

“We’re going to miss our players, but we’re like a professional sports team,” she added. “Players are leaving, but you still love them, you still love your team. So I really hope that this change helps our guys understand that this is OK, yes we’re going to miss our players, but it’s OK to try other things.”

Magee, Touré and Rayburn left at a time when Peloton was in the process of renewing their trainer contracts.

With the reduction in live content, some instructors may be teaching fewer classes, and it’s unclear whether their salaries have been cut as a result, or whether McGhee, Toole and Rayburn quit due to disagreements over compensation.

Cotter declined to answer questions.