With more bad news for Bally Total Fitness Holdings Corp., the question of what bondholders are planning for the fitness club operator looms.

On March 15, Chicago-based Bally filed to delay its 10K with the Securities and Exchange Commission. It also announced hiring Jefferies & Co. as its financial advisor and mentioned the possibility of bankruptcy. And with a $14.8 million coupon due April 15, that's highly likely.

Bill Derrough, co-head of the Jefferies recapitalization and restructuring group, said, "We've been retained as the company's general financial advisor, which means we advise the company on a full range of things--strategic alternatives including M&A, restructuring, refinancing, anything. Could Chapter 11 be a part of that? Yes, but we haven't been retained as a bankruptcy advisor."

The March 15 release states that if Bally is unable to restructure its debt, does not make interest payments or decides to pursue a broader restructuring of the company, "it may seek to reorganize its operations under Chapter 11." A Bally spokesman commented, "We have said in the release and the filing that there are certain circumstances that may cause us to file for Chapter 11 but we haven't given any indication that any of those have occurred." Bally shoulders $827 million in net debt.

Derrough declined to comment on the coupon due April 15.

On Oct. 15, $300 million of 9.875% senior subordinated notes will mature. Derrough said company management revealed the company edited confidentiality agreements with some of its largest creditors during a March 15 conference call. "That may result in some of them converting debt into equity and not necessarily a sale process," he said.

Derrough also said some bondholders have formed an ad hoc committee, which is represented by Daniel Golden, a bankruptcy partner at Akin, Gump, Strauss, Hauer & Feld LLP. Golden did not return a call.

Tennenbaum Capital Partners remains an active bondholder in Bally, said Derrough.

When asked whether buyers have come forward for Bally recently, Derrough responded, "We get lots of phone calls from lots of people-commercial banks calling to lend money, hedge funds calling-that's not unusual in this kind of situation. But we've only been on this for a few weeks." However, he said potential acquirors might be scared off by the company's announcement about not filing its 10K.

Derrough added, "We were not hired specifically to sell the company. It's a general financial advisory role. We analyze every option available, so we've decided to go to dinner [with Bally] but we haven't decided where to go or what to eat."

Bally's market cap has dropped more than 65% to $35 million from $110 million since it announced on Aug. 11 that its strategic review would no longer focus primarily on a sale and that its chairman and chief executive officer, Paul Toback, resigned. On the March 15 news, Bally's shares plummeted 74% to 52 cents and traded at 76 cents at press time.

Bally operates 390 fitness centers under the Bally Total Fitness, Bally Sports Clubs and Sports Clubs of Canada names in the U.S., Canada, Mexico, the Caribbean, China and South Korea.

Derrough said Bally no longer retains JPMorgan, which tried to find a buyer for the whole company, or The Blackstone Group, which advised on the sale of non-core assets including the Crunch Fitness chain. A JPMorgan spokesman did not return a call. Bally was advised at JPMorgan by Robert Kindler, the bank's former head of global M&A who left in April 2006 to supervise M&A at Morgan Stanley.

At this point, Bally could still receive buyer interest for parts of its business, but not the whole company, said Rick Caro, president of Management Vision Inc., a consulting firm focused on the fitness club industry.

Caro said last Tuesday that Bally will likely announce sales of 10 to 12 fitness clubs within a week or so, but he declined to elaborate further. Derrough also declined to comment on the possible club sale.

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