Things get tougher for Bally: Judge rules against company

Things got just a little tougher for Bally Total Fitness (NYSE: BFT) in early August when the struggling company got hit with a double whammy.

First, on Aug. 4, Bally announced that a Federal District Court in the Northern District of Illinois had confirmed an arbitration award of approximately $14.3 million and entered a judgment against the company. The award, which was handed down initially on May 12, stemmed from a contractual dispute related to a program of transferring membership receivables balances into a credit card program.

Furthermore, the company had said in a release about the arbitration award that it does not expect the decision to cause a default under its $275 million secured credit facility until 30 days from the entry of the judgment.

Well, Bally may have misread the situation regarding its secured credit facility. Just a day later, the company said that it had received notices of default under two separate bond issues, after the expiration of a waiver of a financial reporting covenant default.

The delivery of the notices, which relate to its 9.875 percent senior subordinated notes maturing in 2007, and its 10.5 percent senior notes maturing in 2011 commences the 10-day period after which time an event of default occurs under Bally’s $275 million secured credit agreement’s cross-default provision. As a result, delivery of these notices could result in acceleration of Bally’s obligations on or after Aug. 14, 2005, under the credit agreement and the indentures, causing more than $700 million of Bally’s debt obligations to become immediately due and payable.

Bally said it has 30 days to extend the waiver or end the default, and is trying to negotiate an extension with bondholders.

For more on the continuing saga of Bally, see SNEWS® stories, July 25, 2005, “Bickerin’ at Bally’s as Liberation Group looks for changes at the top,” and on July 14, 2005, “Bally seeks another extension on financial statements.”

SNEWS® VIEW: The bad news is coming fast and furious for the one-time industry leader. It seems that the company can’t shovel fast enough to get out from under the debt it has built up — especially if the company has to come up with more than $700 million in the next couple of weeks. If that is the case, many insiders feel that the long-rumored bankruptcy filing will be quicker than a sprint on a treadmill. This ain’t good news for the industry as a whole.