Tuesday 12 June 2018 by FIIG Research At FIIG

Step into FIIG’s new issue – Next Gen

Our latest new issue from Next Gen pays a fixed rate of 7.90%pa and is from Australia and New Zealand’s leading health, racquet and lifestyle group

Next Gen club in Lyneham, Canberra

Today we launch a new FIIG originated AUD45m senior secured bond issue from Next Gen Health and Lifestyle Clubs (Next Gen). The bond will pay a fixed coupon of 7.90% (paid quarterly) and is expected to mature on 22 June 2023. Over the final three years, the bond will amortise by a third leaving Next Gen with AUD30m to refinance at maturity.

The funds raised by the bond issue are being used to refinance existing facilities with NAB. More importantly, this means that bond holders will hold a first ranking charge against the assets of Next Gen. The group’s leasehold and freehold property assets were valued at AUD96.9m in June 2018 – see Figure 1 below.

Wholesale clients can access this bond at a minimum investment amount of AUD50,000 and from thereon in parcels from AUD10,000.

Security valuation summary

Figure 1

The company

Next Gen owns and operates six health clubs in iconic locations across Australia and New Zealand with approximately 28,000 members. The clubs offer multi service health, wellness and leisure facilities including tennis and squash courts, indoor and outdoor pools, spas, saunas and full service gyms. In addition, the clubs include cafes, bars, members lounges, function and event rooms and sports clinics as well as a variety of family friendly services such as crèches, kids rooms and sports programs.

This multifaceted offering places the clubs at the premium end of the market and also helps to ensure that member retention rates are well above industry norms. The diversity of club locations and some diversity of revenue streams provide Next Gen support against a localised downturn, having only experienced a decline in membership in five of the last 18 years.

In 2017, Next Gen generated revenue of AUD42.1m and EBITDA of AUD12.1m. Lease adjusted net debt/EBITDAR was 3.85x at 31 December 2017, and is forecast to peak at 4.14x in 2020.

Development opportunity, potential retap and amortisation

Next Gen’s portfolio includes some of Australasia’s most iconic clubs in strategically located sites. All Next Gen leasehold clubs are situated on sites that are owned by government entities or not for profit associations. As the company incurs significant costs developing the sites and facilities (approximately AUD146m has been invested to date across its portfolio), in return it secures long term lease agreements with low rentals.

Next Gen is currently looking at a development opportunity in Doncaster, Melbourne. The Group believes that the catchment area around the proposed development is ideal to support a Next Gen club. If the Group gets development approval, then the company is expected to tap this issue for a further AUD15m taking the total bond debt outstanding to AUD60m.

If tapped, the bond will amortise from AUD60m to AUD40m by maturity. Figure 2 below outlines the expected cashflows based on a AUD100,000 investment.

Example principal and interest payments for AUD100,000 investment

Figure 2

Implications of ownership structure

Next Gen is owned by private equity funds managed by Kings Park Capital (KPC), a UK based lower mid market private equity fund and long term leisure asset investor. There has been recent speculation about consolidation within the sector as larger groups look to take advantage of economies of scale.

Next Gen managing director, Brett Leahy advised recently that he was not expecting any imminent change to the ownership structure of Next Gen, however the covenant package on the bond includes a ‘Change of control’ clause. This means that the issuer must redeem the notes at 101 (+accrued income) if requested by a noteholder in the event of a change in controlling shareholding.

This new issue will be unrated and as such it will fall outside the risk tolerance of some investors. We encourage anyone considering investing to carefully read the research report available here and other material made available.

Orders can be placed until 10AM Thursday 14 June. If you have any queries, or if you would like to place an order, please call your relationship manager.