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Cascade Fitness · CSFT

DEMO DATAUNDERWRITING ASSUMPTIONHOLD
Investment committee summary · prepared from demo data

Cascade Fitness — Senior Notes 9.00%

DEMO DATAUNDERWRITING ASSUMPTION
Recommendation
HOLD

Proposed investment

Instrument
Senior Notes 9.00%
Unsecured · rank 3
Face value
$100.0M
legal claim
Purchase price
104.0
underwriting assumption
Cash investment
$104.5M
incl. 0.5% fees
Current yield / YTM
8.7% / 8.0%
Hold · maturity
3y · 2031-02-15

Returns

Base IRR (p=55%)7.3%FAIL
Downside IRR (p=30%)2.7%PASS
Severe downside IRR (p=15%)-66.0%
Probability-weighted IRR (of expected cash flows)1.0%FAIL
MOIC base / downside / severe1.22x / 1.14x / 0.17x
Required IRR (hurdle)12%

Credit

Net leverage (FY2025A)5.4xmax 6.0x
Interest coverage (EBITDA / interest)2.01x
Liquidity$90M
Covenant headroom (base, minimum)25%min 15%
Credit score47 / 100Elevated
Next maturity2030

Downside

Recovery (downside / severe)72% / 0%
Loss given default (severe)100%
Default period (downside / severe)FY2030E / FY2027E
Probability of default (weighted)45%
Expected loss23.3%
Recovery needed for MOIC 1.0x60% of face

Key risks (largest first)

  1. Severe-case valuation recovery of 0% is below the 104.0 purchase price: a 100% loss given default.
  2. Refinancing: $700M maturity in FY2030E; only $375M projected liquidity; $325M refinancing requirement.
  3. Downside-case recovery of 72% falls short of the purchase price.
  4. Severe case produces a payment default in FY2027E.
  5. Unsecured, rank 3: $700M of debt ranks ahead.

Key protections (strongest first)

  1. Coverage of 2.01x EBITDA / interest; EBITDA can fall 50% before coverage reaches 1.0x.
  2. Base-case refinancing tests pass for all 1 maturing tranche(s); 0 are repaid from cash.
  3. Membership revenue visibility
  4. Unit growth

Catalysts

  • Call date on notes
  • Same-store membership trends

Diligence — 6 unresolved high-priority item(s)

Tracker →
  • Historical financials tied to filings — In Progress
    Do model inputs reconcile to audited statements?
  • Quality of earnings / EBITDA add-backs — In Progress
    How much of adjusted EBITDA is add-backs?
  • Free cash flow conversion — In Progress
    What is cash conversion after capex and working capital?
  • Debt documentation review — Not Started
    Priming / drop-down protections and baskets?
  • Covenant package and definitions — Not Started
    Covenant EBITDA definition and headroom?
  • Maturity profile and refinancing plan — Not Started
    Is the refinancing plan credible at current leverage?

Investment thesis

Priced above par with ~5.4x net leverage, thin asset coverage (0.5x) and discretionary consumer exposure. Downside recovery on the notes is poor and call protection caps the upside. Avoid at current levels.

The question: Does a 8.0% yield on a rank-3 unsecured claim compensate for 45% probability-weighted default risk and 100% severe-case loss?

Recommendation rationale — evidence from the model

HOLD

HOLD (do not size yet): Base-case IRR clears hurdle (7.3% vs ≥ 12.0%); Expected-cash-flow IRR (probability-weighted) clears hurdle (1.0% vs ≥ 12.0%); Entry yield meets minimum (8.0% vs ≥ 9.0%).

TestActualRequiredWeight
✗Base-case IRR clears hurdle7.3%≥ 12.0%core
✗Expected-cash-flow IRR (probability-weighted) clears hurdle1.0%≥ 12.0%core
✓Downside IRR stays above floor2.7%≥ 0.0%core
✓Downside recovery meets minimum (valuation waterfall)72.2%≥ 60.0%core
✓Base-case refinancing succeedsPASSPASScore
✗Entry yield meets minimum8.0%≥ 9.0%secondary
✓Net leverage within maximum5.4x≤ 6.0xsecondary
✓Covenant headroom (base case, minimum)25.4%≥ 15.0%secondary
✗Principal protected in severe case (recovery ≥ price)0 vs 104.0recovery ≥ pricesecondary
✗No unresolved high-priority diligence6 open0 opensecondary

Rule: PROCEED if all five core tests pass and ≤ 2 secondary tests fail; PASS if the base case and the downside both fail, or ≥ 3 core tests fail; otherwise HOLD. Thresholds (hurdle 12%, min downside IRR 0%, min yield 9.0%, max leverage 6.0x, min recovery 60%, min covenant headroom 15%) are configurable per case. The Excel Investment Summary tab implements the same rule by formula.

What would change my mind?

  • EBITDA declines more than 50% from FY2025A (coverage < 1.0x) — or more than 18% (first covenant breaks).
  • The entry price is above 92.3: the base case no longer earns the 12% hurdle (assumed price 104.0).
  • Collateral / enterprise value falls more than 0% from the base-case valuation: the tranche starts to take losses.
  • Market access weakens: base-case pro-forma coverage at refinancing is 2.63x vs the 1.20x test, at an assumed 9.5% refinancing rate — a higher spread or lower EBITDA flips the test.