Rating Action: Moody's changes Gogo's outlook to positive on announcement of planned CA business sale
Global Credit Research - 02 Sep 2020
New York, September 02, 2020 -- Moody's Investors Service ("Moody's") changed Gogo Inc.'s (Gogo) outlook to positive from stable following the company's announcement  that it had agreed to sell its commercial aviation (CA) business to Intelsat Jackson Holdings S.A.. Concurrently, Moody's affirmed Gogo's Caa1 corporate family rating (CFR), Caa1-PD probability of default rating (PDR), and the B3 rating on Gogo Intermediate Holdings LLC's senior secured notes. The company's SGL-3 speculative grade liquidity rating is maintained.
Gogo reached an agreement to sell the CA business to Intelsat for $400 million in cash, subject to customary adjustments. The transaction has been approved by Gogo's Board of Directors as well as the U.S Bankruptcy Court. Intelsat has also obtained support from key economic stakeholders.
The transaction, which is expected to close before the end of the first quarter 2021, remains subject to customary closing conditions and certain regulatory approvals.
The positive outlook reflects Moody's expectation that Gogo's profitability and credit metrics will improve following the close of the transaction. Gogo's financial strategy, including the extent of debt reduction with the asset sale proceeds, will be an important driver of the credit profile going forward.
..Issuer: Gogo Inc.
.... Probability of Default Rating, Affirmed Caa1-PD
.... Corporate Family Rating, Affirmed Caa1
..Issuer: Gogo Intermediate Holdings LLC
....Senior Secured Regular Bond/Debenture, Affirmed B3 (LGD3)
..Issuer: Gogo Inc.
....Outlook, Changed To Positive From Stable
..Issuer: Gogo Intermediate Holdings LLC
....Outlook, Changed To Positive From Stable
Gogo is expected to use the sale proceeds for deleveraging and investing in the business, most likely through a ramp up of its 5G network in 2021. The affirmation of the Caa1 CFR reflects Moody's expectations that Gogo's Moody's adjusted leverage is likely to remain high in 2021 at around 8x.
The sale of the CA business for $400 million will allow Gogo to focus on its business aviation (BA) segment which, through a high proportion of subscription revenue and more resilient demand, has proven a lot less volatile during the coronavirus pandemic which decimated commercial travel in the second quarter of 2020. The sale will also lead to improved earnings. In H1 2020, Gogo's CA business delivered a loss and has been a drag on margins and profitability compared to the BA segment. The sale should allow Gogo to improve its long term EBITDA and cash flow generation. In 2019, pre-disruption from the coronavirus pandemic but reeling from the Boeing MAX 737 suspension, BA's segment profit of $144 million was already well above the CA's segment profit of $36 million.
In 2020, the CA business has been experiencing revenue declines due to the heavy exposure to the airline industry which is facing unprecedented levels of reduced operations due to the coronavirus pandemic. This segment has been more heavily affected than the BA business because its revenue generation is correlated with the volume of trips whereas the BA segment generates a large majority of its revenue through subscription agreements.
Additionally, as part of the transaction, Gogo will enter into a ten year network services agreement under which Intelsat will have exclusive access to Gogo's ATG services for the CA market in North America. This will guarantee minimum revenue generation of $177.5 million spread out over the ten years of the agreement.
As reflected in its SGL-3 speculative grade liquidity rating, Gogo has an adequate liquidity profile with around $156 million of cash at the end of June 2020 which includes $17 million drawn on its $30 million ABL. Moody's expects this cash balance to be more than enough to weather the cash burn expected to occur in 2020 due to the Covid-19 pandemic's impact on airline travel.
The positive outlook reflects Moody's expectations Gogo's financial metrics as well as its liquidity and long-term financial policy will improve following the sale. Moody's will assess the expected improvements in financial metrics along with the reduction in scale and long-term growth prospects of Gogo following the sale.
The B3 (LGD3) rating on the senior secured notes reflects the probability of default of the company, as reflected in the Caa1-PD PDR, an average expected recovery rate of 50% at default and the particular instrument's rankings in the capital structure.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upwards rating pressure could build up following the sale of the CA business should Gogo evidence a path towards meaningful free cash flow generation as well as a sustained reduction in Moody's adjusted leverage below 6x.
Downward rating pressure could develop should revenue and EBITDA fail to grow in line with the company's expectations leading to leverage increasing in 2021. Additionally, debt financed acquisitions and investments which result in a deterioration in cash flow or overall liquidity position would pressure the ratings.
With headquarters in Chicago, Illinois, Gogo is a global leader in providing broadband connectivity solutions and wireless entertainment to the aviation industry. The company currently operates through the following three segments: Business Aviation (BA), Commercial Aviation North America (CA-NA), and Commercial Aviation Rest of World (CA-ROW), the latter in the early ramp-up stages with sizable operating losses. Gogo currently provides broadband connectivity services to approximately 3,300 commercial aircraft and has about 10,100 connection units on business aircraft. During the 12 months ended June 30, 2020, the company generated $704 million in revenue.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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