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UPDATE 3-Bally files for bankruptcy again, up for sale

(Adds US Bancorp comment, HSBC no immediate comment, paragraph 11)

NEW YORK, Dec 3 (Reuters) - Bally Total Fitness Holding Corp, one of the largest U.S. health-club operators, filed for bankruptcy protection for the second time in 17 months and put itself up for sale after tight credit markets and falling membership caused what it called a “liquidity crisis.”

The Chicago-based company and 42 affiliates filed for Chapter 11 protection with the U.S. bankruptcy court in Manhattan on Wednesday.

Bally said it operates 347 health clubs serving more than 3.1 million customers and employs 14,570 people. It said it had $1.38 billion of assets and $1.54 billion of debts as of Sept. 30, and has more than 100,000 creditors.

“The burden of Bally’s long-term indebtedness, coupled with the lack of refinancing options in today’s constrained credit markets” left no alternative to a bankruptcy filing, despite marked improvement from an ongoing restructuring, Chief Executive Michael Sheehan said in a statement.

Bally filed for bankruptcy protection on July 31, 2007, and emerged as a privately held company on Oct. 1, 2007, after receiving $233.6 million from the hedge fund Harbinger Capital Partners, which took a 100 percent equity stake.

In a court filing, Bally lawyers said the company “encountered a liquidity crisis” in the summer of 2008 because of declining fees and dues and rising operating costs and capital spending.

Despite efforts to cut costs, Bally still had too much debt, and it defaulted on a credit agreement with Morgan Stanley Senior Funding Inc, Wells Fargo Foothill LLC and the CIT Group/Business Credit Inc, the filing shows. Bally obtained the agreement upon emerging from the 2007 bankruptcy.

Harbinger has taken a writedown on its investment, which is small relative to the $12 billion of assets it oversees, a person familiar with the hedge fund said. Bally proved to be a “challenging situation,” the person said.

Bally said it has received “strong” interest from prospective purchasers and is in “active and advanced” talks with some of its lenders to buy its assets and provide financing for day-to-day operations. The company said it can reorganize on its own if it fails to arrange a sale.

The banking units of U.S. Bancorp USB.N and HSBC Holdings Plc HSBA.L are Bally's largest unsecured creditors, with respective claims of $247.3 million and $231.3 million, according to the bankruptcy petition.

U.S. Bancorp spokesman Steve Dale said that bank was named in the petition in its capacity as trustee for debt holders. An HSBC spokeswoman did not have an immediate comment.

Bally retained Houlihan Lokey Howard & Zukin and the law firm Kramer Levin Naftalis & Frankel LLP as its advisers. Harbinger was not immediately available for comment. (Additional reporting by Svea Herbst-Bayliss in Boston; Editing by John Wallace and Brian Moss)