Peloton staved off the cash crunch that threatened its business. Where does it go now?

Peloton no longer faces an imminent liquidity crunch after a massive debt refinancing, but the company still has a long road ahead to fix its business and get back to profitability.

In late May, the connected fitness company secured a new $1 billion term loan, raised $350 million in convertible senior notes and received a new $100 million line of credit from JP Morgan and Goldman Sachs. All of those are due in 2029.

The refinance reduced Peloton’s debt from about $1.75 billion to around $1.55 billion and pushed off looming due dates on loans that it likely wouldn’t have had the cash to pay back.

Before the refinancing, Peloton would have needed to pay around $800 million toward its debt by November 2025. If it managed to pay that, about another $200 million still would have been due around three months later. The term loan would have been due in May 2027.

For Peloton, which hasn’t turned a net profit since December 2020 and has seen sales fall for nine straight quarters, the debt pile posed an existential threat and fueled investor concerns about a possible bankruptcy.

Now that it has refinanced, Peloton has eased investor concerns about liquidity and has the breathing room it needs to try to turn around its business.

The fact that it was able to secure these loans signals investors believe in its ability to rightsize its business and eventually pay them back, restructuring experts told CNBC.

“This refinancing is now putting us in a much better position for sustainable, profitable growth and just a much stronger financial footing than where we were before, and our investors saw that,” finance chief Liz Coddington told CNBC in an interview. “I think they believe in the story. They believe in what we’re trying to do, as do we, and in the transformation of the business. And so it was just a great vote of confidence for Peloton’s future.”

While the refinance may have bought Peloton some time, it’s far from a panacea. Under the terms, Peloton will now be spending about $133 million annually in interest, up from around $89 million previously. It will make Peloton’s efforts to sustain positive free cash flow more difficult.

Coddington acknowledged to CNBC that the higher interest expense is going to “impact” free cash flow, but said that’s partly why the company started to cut costs in early May. The plan is expected to reduce annual run-rate expenses by more than $200 million.

Even with the higher interest payments, Coddington expects the company will be able to sustain positive free cash flow without having the business “materially grow in the near term.”

“The cost reduction plan made us much more comfortable with that,” said Coddington.

While Peloton insists that investors bought into its refinance because they believe in its strategy, some could be trying to put themselves in a better position if the company fails.

Two of Peloton’s largest debt holders, Soros Fund Management and Silver Point Capital, are known to sometimes invest in distressed companies. Since the Peloton loans they invested in are secured, they are near the top of the capital structure. If Peloton can’t turn its business around and ends up in a position where it’s considering or filing for bankruptcy, its creditors would be in a strong position to take control of the company.

“I would describe this refinancing slash recapitalization as sort of opportunistic,” said Evan DuFaux, a special situations analyst at CreditSights and an expert in distressed debt. “I think that’s just sort of a smart, opportunistic and kind of tricky move.”

Silver Point declined to comment. Soros didn’t return a request for comment.

Peloton is in a far better cash position than it was a few months ago, but the company still needs to address the demand issues that have plagued it since the Covid-19 pandemic wound down and figure out what kind of business it will be in the future.

“It really is an exercise in kicking the can down the road because the refinancing itself buys time, but it doesn’t actually fix any of the underlying problems at Peloton,” said Neil Saunders, managing director of GlobalData Retail. “Those are very different issues to the refinancing.”

Following former CEO Barry McCarthy’s departure and with two board members, Karen Boone and Chris Bruzzo, now in charge, Peloton needs to decide: is it a content company, like the Netflix for fitness, or is it a hardware company that needs to develop new strategies to sell its pricey equipment?

So far, straddling both has proven to be unsuccessful.

“They’re going to have to make some decisions about which parts of the model are survivable, which parts are not, or things that they can do to advance forward without losing the great brand value that they still currently have, especially with the loyal following that they have,” said Scott Stuart, the CEO of the Turnaround Management Association and an expert in corporate restructurings.

“Money doesn’t fix everything, and the issue becomes the more money you take 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 addressing its issues by forgetting about trying to grow the business for now and instead focus on “bear hugging” its millions of brand loyalists.

He pointed out that the company makes about $1.6 billion in recurring, high-margin subscription revenue and sees more than $1.1 billion in gross profit from that side of the business.

“The problem is, they lose money. How do you lose money if you’re generating a billion one of recurring gross profit dollars?” said Siegel. “Well, you take all of that gross profit and you spend it to try and chase new growth.”

He said Peloton could generate around $500 million in EBITDA if it cuts research and development, marketing and other corporate expenses. For example, Peloton’s marketing budget is around 25% of annual sales, and if the company reduces it to even 10%, it would still be in the “upper echelon of most brands,” said Siegel.

“Their debt is scary on a company that’s burning cash, their debt’s not scary at all on a company that can make half a billion dollars of EBITDA,” he said. “They have a business that’s generating a tremendous amount of cash. They need to stop spending it.”

In May, Peloton announced it would cut 15% of its corporate workforce, but it may be more reluctant to back off its growth strategy. Peloton founder John Foley set a goal of growing to 100 million members, and McCarthy adopted the target when he took over. As of the end of March, Peloton had about 6.6 million members — woefully behind that long-term target.

Since the company announced its cost cutting plan, McCarthy’s departure and another disastrous earnings report in early May, Peloton has been largely mum on its strategy. It said that it’s searching for a new permanent CEO, and the person it hires will offer clues about the company’s direction.

If it hires another “hyper growth tech CEO” like McCarthy – who had done stints at Netflix and Spotify – then Peloton will likely face the same issues, Siegel said. But if it taps someone different, it could signal a strategy shift.

One notable shift afoot at Peloton is its live programming schedule. The company currently offers live streaming classes from its New York studio seven days a week, but beginning on Wednesday, that will change to six. Last month, its London studio moved from seven days of live streaming classes to five.

“We’re all going to still be creating, creating social content, dropping new classes,” Peloton’s Chief Content Officer Jen Cotter told CNBC. “I think that we’ll just be using the brain space that would have been spent on live classes that day to come up with new programs, new ways to distribute wellness content, new categories of business to go in, like nutrition and rest and sleep, which we’ve not really done as deeply as we plan to do.”

She added that the change will save the company some money, but it’s more of an opportunity to make better use of its production staff than it is a cost-cutting measure.

For example, the company in May partnered with Hyatt Hotels as it tries to generate new revenue and diversify income streams. As part of the agreement, hundreds of Hyatt properties will be outfitted with Peloton equipment, and guests will have access to bespoke Peloton classes on their hotel room TVs in around 400 locations. The schedule tweak will allow staff to be available to make content for projects like the Hyatt partnership.

The shift comes after three Peloton trainers – Kristin McGee, Kendall Toole, and Ross Rayburn – decided not to renew their contracts with the company. The news raised concerns among Peloton’s rabid fanbase that trainers, one of its core assets, were leaving in droves.

Cotter insisted the parting was amicable – and the door is open should the athletes want to return.

“All I can say is, they decided they wanted to leave. All the instructors were offered contracts and I mean it when I say we have deep respect and appreciation for what they’ve contributed, and if they want to try something new, that’s okay,” said Cotter.

“As much as we’re going to miss them, we are like a professional sports team,” she added. “Athletes do leave the team and you still love the athlete and you still love the team and so we’re really hopeful that this change does allow our members to understand this is okay, and yes, we’re going to miss them, but yes, it’s okay for people to go try other things.”

McGee, Toole and Rayburn all left when Peloton was in the process of renewing trainer contracts.

Some instructors may be teaching fewer classes as part of the live content pullback. It’s unclear if any instructors took pay cuts as a result, or if McGee, Toole and Rayburn left because of disagreements over compensation.

When asked, Cotter declined to answer.