24 Hour Fitness reported a slight uptick in EBITDA and revenue for 2Q18, which provided a nudge to the highly-levered gym operator’s minimal free cash flow, said three sources familiar with the matter.

The borrower’s USD 850m Libor+ 350bps (0% floor) TLB due 2025, issued in a refinancing this past May, edged up over the last week as investors anticipated a modestly positive earnings report, one of the sources said. Post-earnings yesterday, the loan is quoted in the 100.625/101.042 context, compared to 100.25/100.667 on 31 July, according to Markit.

The company’s USD 500m 8% senior unsecured notes due 2022 traded up to 99.75 yielding 8.072% today from 98.75 on 31 July, though that’s down from trades in the 101 area at the time of the loan refinancing in May. The notes were placed in 2014 to back the company’s USD 1.85bn LBO by AEA Advisors, Ontario Teacher’s Pension Plan and Fitness Capital Partners.

For 2Q ended 30 June, the company generated USD 65.6m of adjusted EBITDA, up 3% from USD 63.9m in the prior-year period, driven by lower recurring costs and higher revenue, partially offset by a lower gross margin, the sources said.

Quarterly revenue increased roughly 4% to USD 379m, from USD 365m generated during the corresponding period, sources said. The company credited an increase in membership club dues and personal training revenue for the slight uptick.

24 Hour’s leverage is around 5.7x, or 5.4x net of cash, based on USD 1.35bn in total debt, sources said. When the company marketed the refinancing three months ago, it pitched a pro forma EBITDA figure of USD 265m, though some investors whittled their own view of the figure back to around USD 210m, as reported.

During the first six months of this year, the company generated around USD 11m of free cash flow, based on cash from operations of USD 86.6m and net capex of USD 75.7m, the sources said. That’s up by USD 2m-USD 3m versus the same period last year, two of the sources said. Theoretically assuming USD 22m in free cash flow for the year would amount to about 1.6% of total debt.

“Free cash flow is still not great, but it is probably not going to be zero this year,” one of the sources said.

Looking ahead, the company plans to have net openings of 11 clubs by the end of 2018, sources added.

A representative at sponsor AEA Advisors declined to comment.

2018 Debtwire