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Peloton avoids liquidity crunch in global refinancing
A Peloton bike is seen inside a showroom in New York, U.S., on Wednesday, Nov. 1, 2023. Peloton Interactive Inc. is scheduled to report earnings figures on Nov. 2.
Michael Nagle | Bloomberg | Getty Images
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 hasn’t turned a net profit since December 2020 and has seen sales decline for nine straight quarters, the debt pile has represented a 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 a much better financial position than it was a few months ago, but the company still needs to figure out its problem. demand issues that have plagued him since the Covid-19 pandemic subsided and figure out what kind of business he 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 would cut 15% of its corporate workforceBut 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 behind 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 had stints 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 equipped 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.
The spotlight next week will shift somewhat to the Federal Reserve’s second-quarter earnings season and monetary policy. Market watchers will be treated to results from several major names, including Dow 30 components Goldman Sachs (GS), UnitedHealth (UNH), Johnson & Johnson (JNJ) and American Express (AXP), along with streaming giant Netflix (NFLX).
The Fed will still attract some attention as investors will be eager to hear from a packed lineup of central bank speakers just before the policy meeting lockout period.
In terms of the economic calendar, after fifteen days of labor market and inflation indicators, activity data will gain momentum in the form of the latest retail sales and industrial production reports.
Earnings Highlight: Monday, July 15 – Goldman Sachs (GS) and BlackRock (Black). See the full earnings calendar.
Earnings Highlight: Tuesday, July 16 – UnitedHealth (UNH), Bank of America (BAC), Progressive (PGR), Morgan Stanley (IN), PNC Financial (PNC) and JB Hunt Transport (JBHT). See the full earnings calendar.
Earnings Highlight: Wednesday, July 17 – Johnson & Johnson (JNJ), US Bancorp (USB), Morgan Children (KMI), United Airlines (UAL) and Ally Financial (ALLY). See the full earnings calendar.
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Earnings Highlight: Friday, July 19 – American Express (AXP), Halliburton (THANKS) and Travelers (VRT (return to recoverable value)) See the full earnings calendar.
IPO Observation: Hospital and healthcare clinic operator Ardent Health Partners (TARDT), insurance service provider Twfg (TWFG) and the biotechnology company Lirum Therapeutics (LRTX) are expected to price their IPOs and begin trading next week. The analyst quiet period ends at Rectitude (RECT) to free up analysts to publish ratings.
Police cars outside the residence of Thomas Matthew Crooks, the suspected shooter at a Trump rally on Saturday, investigate the area in Pennsylvania. Following the incident, one rally attendee was killed, two rally attendees are in critical condition and Donald Trump suffered a non-fatal gunshot wound. The shooter is dead after being shot dead by the United States Secret Service. (Photo by Kyle Mazza/Anadolu via Getty Images)
Investors will initially favor traditional safe-haven assets and may lean toward trades more closely tied to former President Donald Trump’s chances of winning the White House after he survived an assassination attempt, according to market watchers.
“There will undoubtedly be some protectionist or safe-haven flows into Asia early this morning,” said Nick Twidale, chief market analyst at ATFX Global Markets. “I suspect gold could test all-time highs, we’ll see the yen being bought and the dollar, and flows into Treasuries as well.”
Early market commentary suggested Trump’s shooting at a rally in Pennsylvania on Saturday could also prompt traders to increase his likelihood of success in the November election. His support for looser fiscal policy and higher tariffs is generally seen as likely to benefit the dollar and weaken Treasuries.
An indicator of market sentiment heading into the weekend: Bitcoin surged above $60,000, likely reflecting Trump’s pro-crypto stance.
Other assets positively linked to the so-called Trump trade include stocks of energy companies, private prisons, credit card companies and health insurers.
Traders will also be closely watching market measures of expected volatility on Monday, such as those in the tariff-sensitive Chinese yuan and Mexican peso, which have begun to price in the U.S. vote.
Trump said he was shot in the right ear after a shooting at his rally. His campaign said in a statement that he was “fine” after the incident, which prompted him to rush off the stage.
“Currencies will be the first major market on Monday in Asia to react to the weekend’s shots. There’s potential for extra volatility, and getting a clear reading could be especially difficult because liquidity will be hurt by Japan’s national holiday,” said Garfield Reynolds, Asia team leader for Bloomberg Markets Live.
Strategists had already expected a volatile run-up to the election, particularly as Democrats are still agonizing over President Joe Biden’s candidacy after his poor performance in last month’s debate raised questions about his age. Investors were also grappling with the possibility that the election could end in a drawn-out dispute or political violence.
But there is little precedent for events like those in Pennsylvania. When President Ronald Reagan was shot four decades ago, the stock market plunged before closing early. The next day, March 31, 1981, the S&P 500 rose more than 1% and benchmark 10-year Treasury yields fell 9 basis points to 13.13%, according to data compiled by Bloomberg.
Bond investors should pay particular attention as the attack is likely to boost Trump’s election chances and ultimately lead to concerns about the fiscal outlook, according to Marko Papic, chief strategist at California-based BCA Research Inc.
“The bond market must at some point become aware of President Trump’s greater chances of winning the White House than any of his rivals,” Papic wrote. “And I continue to believe that as his chances increase, so too must the likelihood of a bond market revolt.”
Kyle Rodda, senior financial markets analyst at Capital.com, said he was seeing client flows into Bitcoin and gold following the shooting.
“This news marks a turning point in American policy norms,” he said. “For markets, it means safe-haven trades, but more tilted toward non-traditional safe-havens.”
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Jio Financial share price: Should you buy this Reliance group stock on Monday ahead of Q1 FY2024 results?
Q1 2024 Results: Jio Financial Share Price will be in focus on Monday as the Reliance Group company has a fixed board meeting on July 15, 2024 to consider and approve the company’s unaudited standalone and consolidated financial results. Trust Group company informed about the Q1 2024 Results date on Wednesday last week via an exchange filing. According to stock market experts, Jio Financial Services Limited is poised to deliver impressive Q1 results for FY25 on solid operating income. They have forecast a healthy QoQ PAT for the company in Q1 FY25.
Jio Financial Services News
Speaking on the Jio Financial Services Q1 2024 results, Manish Chowdhury, Head of Research, StoxBox, said, “We believe Jio Financial Services is poised to deliver impressive results in Q1FY25 aided by its operating income, which is likely to show robust growth driven by strong investment income, which in turn should lead to healthy PAT growth on a sequential basis. Jio Financial Services continues to make strategic moves such as launching digital products and expanding its ecosystem, with a clear focus on future growth. The company has announced plans to introduce products for lending against stocks and mutual funds, leveraging Jio’s large user base, which could be a significant growth driver in the coming quarters.”
“Furthermore, with the NBFC receiving RBI approval to become a primary investment company, Jio Financial Services is well-positioned to unlock value from its investments. Overall, we expect the company to report robust numbers in the upcoming quarter,” the StoxBox expert added.
Jio Financial Stock Target Price
Speaking about the technical outlook of Jio Financial share price, Ganesh Dongre, Senior Manager, Technical Research at Anand Rathi, said, “Jio Financial Services share price is poised to make a fresh high at the ₹260 apiece level. If the stock breaks above this mark, the Reliance Group stock could make a fresh high by touching the ₹290-₹295 zone. Hence, those with Jio Finance stock in their portfolio are advised to stick to the script by keeping a stop loss at ₹205. If the stock breaks above ₹260 decisively, then one can upgrade the stop loss at ₹240 for the near-term target of ₹295.”
On the advice to new buyers regarding Jio Financial stock, Ganesh Dongre said, “New buyers are advised to wait for the breakout. Once the stock breaks above ₹260, one can buy this Reliance Group stock at the short term target of ₹295, keeping a stop loss of ₹240 apiece.”
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, and not of Mint. Investors are advised to consult with certified experts before making any investment decisions.
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