A Peloton bike is seen at a showroom in New York, U.S., on Wednesday, Nov. 1, 2023. Peloton Interactive Inc. is scheduled to release earnings numbers 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 pushed back looming due dates on loans it likely wouldn’t have had the money to repay.
Before the refinancing, Peloton would have had to repay about $800 million of its debt by November 2025. If it were able to pay that amount, about $200 million more would still be due about three months later. The term loan would have been due in May 2027.
For Peloton, which hasn’t made a net profit since December 2020 and has seen sales fall for nine straight quarters, the debt pile-up posed an existential threat and fueled investor concerns about a potential bankruptcy.
Now that it has refinanced, Peloton has eased investors’ liquidity concerns and has the room to maneuver to try to turn around its business.
The fact that it was able to secure these loans indicates that investors believe in its ability to scale its business and repay them over time, restructuring experts told CNBC.
“This refinancing now puts us in a much better position for sustainable, profitable growth and a much stronger financial foundation than we were on before, and our investors saw that,” CFO Liz Coddington said in an interview with CNBC. “I think they believe in our story. They believe in what we’re trying to do, as we do, and the transformation of the company. So it was a big vote of confidence in the future of Peloton.”
While the refinancing may have bought Peloton some time, it’s far from a panacea. Under the terms of the refinancing, Peloton will now have to spend about $133 million a year in interest, up from about $89 million previously. That will make it harder for Peloton to maintain positive free cash flow.
Coddington acknowledged on CNBC that higher interest costs would “impact” free cash flow, but said that was part of the reason the company began cutting costs in early May. The plan is expected to reduce ongoing annual expenses by more than $200 million.
Even with higher interest payments, Coddington expects the company to be able to maintain positive free cash flow without the business “experiencing material growth in the near term.”
“The cost-cutting plan has made us much more comfortable with that,” Coddington said.
Although Peloton insists that investors have embraced its refinancing because they believe in its strategy, some may try to put themselves in a better position if the company goes bankrupt.
Two of Peloton’s largest debt holders, Soros Fund Management and Silver Point Capital, are known for occasionally investing in distressed companies. Because the Peloton loans they invested in are secured, they sit near the top of the capital structure. If Peloton fails to turn its business around and ends up in a situation where it considers or files 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 tricky 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 resolve the demand issues that have plagued it since the end of the Covid-19 pandemic and figure out what kind of business it will be in the future.
“This is really a delay exercise because the refinancing itself buys time, but it doesn’t solve any of Peloton’s underlying problems,” said Neil Saunders, managing director of GlobalData Retail. “Those are very different problems than the refinancing.”
With former CEO Barry McCarthy stepping down and two board members, Karen Boone and Chris Bruzzo, now in charge, Peloton must decide: Is it a content company, like Netflix for fitness, or is it a hardware company that must develop new strategies to sell its expensive gear?
So far, efforts to reconcile these two goals have proven ineffective.
“They’re going to have to make decisions about what parts of the model can survive, what parts can’t, or what things they can do to move forward without losing the great brand value they still have right now, particularly with the loyal customer base they have,” said Scott Stuart, CEO of the Turnaround Management Association and a corporate restructuring expert.
“Money doesn’t solve everything, and the problem becomes that the more money you take out and the more you refinance…the more problematic it becomes,” he added.
Simeon Siegel, a retail analyst for BMO Capital Markets, said Peloton can start to solve its problems by forgetting about trying to grow the business for now and instead focusing on “nurturing” its millions of brand loyalists.
He noted that the company generates about $1.6 billion in high-margin recurring subscription revenue and makes more than $1.1 billion in gross profit from that side of the business.
“The problem is they’re losing money. How do you lose money if you’re generating a billion dollars in recurring gross profit?” Siegel said. “Well, you take all that gross profit and you spend it trying to pursue new growth.”
Peloton could generate about $500 million in EBITDA if it cut spending on research and development, marketing and other corporate expenses, he said. For example, Peloton’s marketing budget is about 25% of annual sales, and if the company cuts that to 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, but it’s not scary at all for a company that can generate half a billion dollars of EBITDA,” he said. “Their business generates a huge amount of cash. They need to stop burning it.”
In May, Peloton announced it would cut 15% of its workforce, but it may be more reluctant to abandon its growth strategy. Peloton founder John Foley set a goal of growing to 100 million members, and McCarthy adopted that goal when he took over. As of late March, Peloton had about 6.6 million members, well below 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 remained largely mum on its strategy. The company has said it is looking for a new permanent CEO, and whoever it hires will offer clues about the company’s direction.
If the company hires another “fast-growing tech CEO” like McCarthy — who has worked at Netflix and Spotify — then Peloton will likely face the same issues, Siegel said. But if it hires someone different, it could signal a shift in strategy.
One notable change coming to Peloton is its livestreaming program. The company currently offers livestreamed classes from its New York studio seven days a week, but starting Wednesday, that number will increase to six. Last month, its London studio went from offering seven days of livestreamed classes to five.
“We’re all going to continue to create, create social content, offer new classes,” Peloton Chief Content Officer Jen Cotter told CNBC. “I think we’re just going to use the brain space that would have been dedicated to live classes that day to come up with new programs, new ways to distribute wellness content, new categories of activities to address, like nutrition, rest and sleep, that we haven’t really delved into as deeply as we had planned.”
She added that the change would save the company money, but was more of an opportunity to better utilize its production staff than a cost-cutting measure.
For example, in May, the company partnered with Hyatt Hotels to try to generate new revenue and diversify its revenue streams. Under the deal, hundreds of Hyatt properties will be outfitted with Peloton equipment, and guests will have access to personalized Peloton classes on their hotel room TVs at about 400 locations. The schedule shift will free up staff to create 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 sparked concern among Peloton’s rabid fans, who feared that trainers, one of its biggest assets, would leave in droves.
Cotter insisted the split was amicable and the door was open if the athletes wanted to return.
“All I can say is they’ve decided to leave. All the instructors have been offered contracts and I mean it when I say 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 okay,” Cotter said.
“Even though we’re going to miss them a lot, we’re like a professional sports team,” she added. “Athletes leave the team and you still love them and the team. So we really hope that this change will help our members understand that it’s okay, and yes, we’re going to miss them, but yes, it’s okay for people to try other things.”
McGee, Toole and Rayburn all left as Peloton was in the process of renewing coaches’ contracts.
Some instructors may have to teach fewer classes as part of the reduction in live content. It’s unclear whether any instructors took pay cuts as a result, or whether McGee, Toole and Rayburn left due to disagreements over compensation.
When asked, Cotter declined to answer.