Expect Leisure and Entertainment Defaults to Approach 30% This Year

The US leisure and entertainment institutional leveraged loan default rate is approaching levels last seen during the Great Recession.

Due to persistent pandemic-driven operating and liquidity challenges, leisure and entertainment defaults could approach 30% in 2021 after hitting 9.9% in 2020, according to Fitch Ratings. By comparison, the rate was 32.8% following the Great Recession in 2009.

Fitch Ratings says leisure and entertainment could account for roughly 25% of all leveraged loan defaults despite improved access to capital.

Leisure and entertainment loans represent $12 billion, or 31% of volume on Fitch’s Top Loans of Concern (LOC). That is double the amount of the next highest sector. Overall, the company lists $39 billion in loans of concern.

Among the major companies on Fitch’s Fitch’s Top Loans of Concern list are Cineworld Cinemas, Travelport, AMC Entertainment and Equinox. AMC issued $646 million of debt and equity at the end of January and the company, which is the largest movie theater operator globally, believes the increased liquidity extends its financial runway deep into 2021.

As public-health mobility curtailments result in extended theatre closures, Fitch says movie theaters’ near-term operating environment remains challenging. “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,” according to Fitch.

When the lockdowns end, Fitch expects movie theaters to benefit from pent-up demand. It cites strong attendance at theaters once they reopened after the first wave of coronavirus infections. However, with the rise 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, theaters may face severe headwinds in the future.

In the fitness industry, Fitch says budget gyms are outperforming boutique operators, especially those without membership models and those concentrated in dense, urban locations. Not surprisingly, gym operators in states with more stringent operating restrictions are underperforming geographically diverse franchises.

As mid-prices and boutique gyms are forced to close, Fitch expects budget gyms to gain market share. While same-store revenue for budget gyms is projected to be down 10% in 2021 relative to 2019. But it should recover to pre-pandemic levels by 2022.

Class-only boutique operators will be challenged by lower-priced alternatives and the success of at-home fitness concepts. Fitch expects revenue declines to remain severe through 2021, with declines of more than 50% compared to 2019.