Following the Covid pandemic, and the period of reopening, there has been a change in consumer behaviour and preferences, with health and wellbeing moving to the forefront of the consumer’s mind. There has also been a structural shift from valuing material goods to valuing experiences.

Consequently, following the first burst of pent-up demand in the year of reopening, demand for travel & leisure services has remained exceptionally robust and has sustained its continued growth momentum. One area where we have been able to express our constructive view on the sector and its structural changes has been through exposure to the UK gym space.

More focus on physical and mental wellbeing has made going to the gym almost an essential item in the monthly budget of many UK households. However, even within the sub-sector, we find different business models with different price points, ranging from no frills “budget” gyms to more high-end, comprehensive health clubs. We believe the best way to invest in this sector is to follow a “barbell” approach, by having exposure to budget gyms and higher-priced health clubs, while avoiding the middle segment of the price range.

Within the budget segment, PureGym is a credit we continue to like. With c. 600 gyms across the UK, Denmark, Switzerland, and now the Middle East, PureGym offers access to large, well-located, and well-equipped gym facilities for as little as £22 per month. While we would not go as far as thinking leisure is a “defensive” sector, there is plenty of historical evidence of resilience for this kind of business model during economic downturns i.e., a recession hedge.

Sticky customer base

PureGym navigated the complex Covid period supremely well, having been very well-capitalised and having managed their cash very efficiently, and has benefitted from strong sponsor support from two leading PE funds. Since then, membership, average revenue per member per month, revenue, EBITDA, and margin have all continued to grow strongly, resulting in a successful refinancing in October last year, where we rolled our existing position into the new deal. The business continues to expand its footprint through organic cash flow and has meaningfully deleveraged over the last couple of years (a characteristic we like to see in credits we hold).

At a materially higher customer price point, we own David Lloyd bonds. The company offers a much more complete “health club” experience with facilities including pool, spa, gym, exercise classes, tennis and padel courts, restaurants, creches, workspaces and much more, across c. 130 clubs in the UK and Europe. With memberships ranging from £90 to £200 per month (there’s even a dedicated third-party website to keep track), David Lloyd caters to a middle-class, more affluent demographic. Higher disposable income for target clients makes David Lloyd less sensitive to changes in the overall macroeconomic backdrop, with a remarkably sticky customer base and low attrition. David Lloyd has strong operating momentum, driven by increasing membership, new club openings, raising the quality of existing clubs to premium levels by improving facilities and opening spas, and price increases, all of which have contributed to strong EBITDA growth and subsequent deleveraging.

 Prudent ratings

Turning to the budget hotel space we have found value with our investment in Travelodge bonds. Like gyms, hotel operators suffered badly during the pandemic, but have bounced back strongly with meaningful improvement in fundamentals across the globe, leveraging on the trends that reoriented consumer spending from goods to experiences.

Travelodge operates c. 600 budget hotels in the UK, Ireland, and Spain. Again, the “budget” nature of Travelodge makes it a more resilient candidate for portfolio inclusion in a downturn, as well as the credit being very lowly levered. Operating metrics continue to meaningfully improve, and we rolled our existing position last year when the company refinanced.

Notwithstanding the solid investment thesis for deploying capital to the space, the rating agencies have been very prudent when rating these types of businesses in the HY market post-pandemic, given their perceived cyclicality, asset light nature and lease liabilities.

Like the Gaming sector (although for different reasons), it tends to be harder for these companies to score credit ratings above single-B. However, HY credits like PureGym and Travelodge still offer a decent spread pick-up (+50bps) vs. the current OAS of 355bps for EUR Bs. Importantly, the balance sheets of these companies are in much better shape than at most points in the last decade or so.

The European high yield market has relatively low exposure to the leisure sector e.g., less than 4% of the ICE BofA EUR HY Index. Nevertheless, in the last few years, this space has been fertile ground for finding interesting opportunities, many of which have been included in our various fixed income strategies. In Dynamic Bond and Strategic Bond strategies, currently c. 1.5% of the portfolio is allocated to EUR and GBP HY bonds in the Travel & Leisure sector. These bonds provide very compelling yields ranging from 7.5% to above 9% for the GBP securities.
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